Wisdom of the Crowd and that of the VCs

question-1-startup-quizIn my last article I presented the results of the startup investment decision quiz. When you look at the final score it would appear very few, about 4.7%, got it 100% right. That is their investment decisions are exactly same as that of the VCs’. Let us look at it another way, say instead of you making the decision in isolation what if you are able to change your decision after seeing how the majority decided.

That is make a choice, so will many others without seeing or discussing with each other. Then you get to keep or change your choice based on the wisdom of the crowd. Since the crowd here is diverse enough with different background and experience it is reasonable to assume the crowd does not suffer from groupthink. Let us assume simple majority rule, >50% wins.

Now how does the wisdom of the crowd (of 234) compare to that of one VC firm? Here is the summary of the results with the table showing percentage of YES and NO decisions by the crowd and the VC’s decision for comparison.

startup-results

Not all that bad now, comparing the wisdom of the crowd with that of the VCs. The two startups that  got the termsheet from the VCs got one from the crowd as well. The crowd made the same positive decisions. And on the rest of startups the crowd decided to give termsheet to two additional startups the VCs passed on.

While the crowd did not miss on opportunities it was little more lenient in saying yes. If these two startups really are duds (so to speak) the crowd’s decisions will be called  “false positives”. If these results scale over large number  that is twice as many startups that will get funding when they shouldn’t.

Look at it this way, when there is unlimited funding to go around (with many VC firms, angels and others with unlimited money that fancy themselves as one) and unlimited number of startups pitching their venture (everyone is a founder), there are bound to be many false positives.

And that is not all good. It is just frothy.

One thought on “Wisdom of the Crowd and that of the VCs

  1. The crowd picking companies you didn’t isn’t necessarily a miss. They could turn out to be ones you later wish you had invested in.

    You should do this poll with 100% dead or exited companies, that you’ve both invested in and passed on.

    Like

Comments are closed.