Stop the spray and pray and why VC investors need real training

This article summarizes an episode of Vertex Ventures’s video series featuring its group president, Kee Lock Chua.

President and CEO of Vertex Holdings, Kee Lock Chua/ Photo credit: Vertex Holdings

Venture capital often prioritizes rapid deals and perfect spreadsheets, but group president and CEO of  Vertex Holdings, Kee Lock Chua, argues this approach miscalculates risk. He insists the foundation of a successful investment lies in human behavior rather than financial models.

Accurately assessing a founder’s character requires a level of patience many modern investors lack, and moving slowly to evaluate resilience ultimately prevents disastrous financial mistakes.

Rethinking how to judge founders

Analyzing market data is straightforward, yet judging the people building the company carries the actual financial risk. Investors must therefore look beyond the numbers to assess character.

Chua considers this the hardest part of the job. “Understanding the person’s ability, what motivates the person, and what is the person’s attitude towards investors, and their attitude towards failure” is essential, he notes.

While anyone can build a financial model projecting future profits, these numbers provide a false sense of security for inexperienced investors.

The real work involves predicting how a human being will react when those early projections fail. It requires hours of conversation outside of a formal boardroom setting.

Dealing with stubborn founders and problems
Founders who ignore new information become liabilities under pressure. Because a standard pitch meeting masks these behavioral flaws, investors need to observe how leaders react when things go wrong.

A major warning sign is a founder whose mind is already made up.

“They think that the world is flat, and no matter what you tell them, they believe the world is flat,” he warns.

A startup rarely succeeds with its original business plan, meaning survival requires adjusting the product based on customer behavior. If a leader lacks the mental flexibility to accept harsh market feedback, the company will quickly run out of money.

Therefore, investors must look for leaders who combine confidence with the humility to admit when their initial assumptions are incorrect.

The cost of rushed deals

Identifying this necessary mix of confidence and humility takes time. Rushing to close deals with minimal dialogue leads to poor investments, while making deliberate decisions helps firms build stronger relationships.

Setting rules for giving advice

The need for real training