Nestled in the culture of startups and venture capital is a false belief that raising venture capital from a certain tier of VC firm “makes” a startup.

There is a revered aura around a startup being accepted to Y Combinator or getting funded by a16z or Sequoia Capital. The trap is believing that if a startup has a certain investor on its cap table, the startup is destined for greatness.

I felt this as a founder. When I tell people my story, even now, I make sure I tell people that my FinTech startup raised venture capital from a Fortune 500 corporation. It gives elevation and credibility to a startup story that otherwise could have gone better. 😀 The brand trap is real.

Yet, on the investor side, this brand trap is a reality distortion field in investing. It makes it harder to see the opportunity objectively. Rather than thinking for themself, investors assign a certain level of credibility to the startup opportunity based on who is investing in the deal. The investor thinks, quite logically I might add, yet still erroneously, something like, “This startup has passed that VC Firm’s due diligence process such that the VC Firm is investing. The VC Firm has a solid track record of venture investing, so must be a solid deal. Right?”

Maybe.

✅ The truth is, who is on the cap table does not change and should not change the underlying startup opportunity. ✅

The atomic unit of the startup opportunity is the company itself and the founding team itself.

✅ But the practical reality is, who is on the cap table does tend to distort a founder and investor’s ability to think objectively about that startup. ✅

In this post, I’ll take on this brand trap from an investor perspective.

I deal with this reality distortion field nearly every day. I’ll call out two different categories that has helped me categorize my thinking around how I navigate this.

The Two Types of Investor Conviction

There are two categories of conviction that investors can have on a startup, that would lead them to invest or to pass - owned conviction and borrowed conviction.

Owned Conviction

✅ Owned conviction is when an investor develops his or her own conviction to invest or to pass based on the underlying opportunity - regardless of the investors in the round or the FOMO that may exist. ✅

Borrowed Conviction

✅ Borrowed conviction is when an investor who is evaluating a deal borrows the conviction of another investor who has previously made an invest or pass decision on the deal. ✅

They base their decision more on the investors in the deal, rather than the startup opportunity itself.

Owned Conviction

To be sure, owned conviction is an absolute necessity. As Peter Thiel writes in his book, “Zero to One, “The most contrarian thing of all is not to oppose the crowd but to think for yourself.”

On the road to owning conviction on a deal, every investor has their own process and mental models. No investor can be strong on every aspect of the startup, so investors lean in towards certain aspects of a startup more than others and hold those aspects to a very high standard, while being less focused on other aspects.

Recently, a co-investor relationship replayed to me my own mental model. I was on the phone with a co-investor, Todd Sobotka of Brightstar Wisconsin. Todd and Brightstar is one of Tundra Angels’ major co-investor relationships. We have co-invested in eight companies together - COnovate, Pyran, Immuto Scientific, Isomark, Blue Line Battery, DropCap, Midwest Games, and Intrnls.

Todd told me about a recent conversation he had with a founder where he was speaking to the founder about the mindsets of different investors in his network. Todd told me that he relayed to this founder,

“Kee is going to hit you hard on your Go-To-Market strategy. He is not hardly going to give much attention to the technology. He’s just going to assume it to be true and suspend the technology and be completely focused on product distribution.”

I had to laugh. Todd had well sized up some of my interactions in the first part of my process with startup founders. Ironically, just this week, I found myself doing it. I was sitting in a coffee shop talking with a startup founder. The founder was lining up all of the things that they needed to do to get their product live. I asked the question, “Suppose everything worked out with the capital and technology you have in your hands right now the product of your dreams. You would have still not have proven that you can sell it, so that is the key market risk. How do you know if they will actually buy it?”

Owned conviction is an imperative in startup investing.

Borrowed Conviction

But, a dose of borrowed conviction is also healthy, as investors need to have this fundamental level of trust in each other to co-invest in the first place.

But, borrowed conviction becomes a major peril for investors when borrowed conviction becomes the main criterion in the decision, instead of owned conviction being the main criterion in the decision.

Investors face a very real temptation to suspend typical analysis of certain variables of the startup in order to serve a bias.

The FTX collapse in November 2022 is the most egregious example of when borrowed conviction dominated an investment decision.

Sequoia Capital, a darling of Silicon Valley VCs, had conviction over time to invest $214 million in FTX. With its high conviction and enthusiasm on FTX, Sequoia brought many, many investors along with them. We will never know how many other investors that piled on over time were borrowing their own conviction from Sequoia versus owning their own conviction on the deal.

Borrowed conviction must exist, but exist in small doses compared to the importance of owned conviction.

Owned Conviction is Often Contrarian

Owned conviction often puts an investor on an island of their own thinking, and that is scary.

At one point, I spoke to a startup founding team. The startup had raised millions in venture capital. I knew a number of their investors and respected their processes and what they brought to the table. I felt an intense pull to borrow their conviction on this deal because of how much I trusted their process.

Yet, as I talked more to the founder and engaged in various touch points, there was one aspect that continued to make me concerned.

The startup had been executing on a path with their product and go-to-market strategy that left them with very few options to pivot once they hit the market. If they hit the market and discovered that they needed to recalibrate, they would only have a few levers to pull for a second market incursion before they would run out of cash and have to re-raise. That lack of optionality scared me.

When I communicated our decision to pass, I communicated to the founding team something like,

Me: “The market risk seems to be still up in the air. I think some customers will buy, but the question remain on how broad the demand for the product will be? Also, there are also questions around the go-to-market strategy since the GTM strategy motion hasn't been able to be executed yet. Once a product gets to market, then there is experimentation to be done around messaging, channels, end user audience, etc. The current execution path does not seem to leave much room for lateral passes.”

In the founders’ email back to me, one of the co-founders responded to my concerns and then this line in the email caught my attention:

Founder: “After raising [$X millions] primarily from institutional investors, I was surprised to hear that the risk appetite felt too great, especially as we’ve moved well beyond the angel phase.”

I didn’t miss what this founder was writing between the lines.

The founders assumed that I would make my investment decision by borrowing the conviction of their investors - investors that the founder knew that I knew well. The founders were surprised to hear that I was owning my conviction on the underlying startup opportunity.

I wanted to make clear to this founder that I was intentionally choosing to own my conviction instead of to borrow it. In my response, I made sure to include, “I totally hear the [$X millions] that has already been invested but the risk still exists.”

In other words, I was telling the founder, "Who is on the cap table does not change the underlying startup opportunity.”

Now, did we make the right call? Did all of those other investors miss something that we happened to see? Or do all of them believe something that we didn’t see, or that we didn’t choose to see?

I don’t know. Time will tell.

Closing Thoughts

One of my favorite quotes is from Omar Bradley that says, “Set your course by the stars, not by the lights of every passing ship.”

The false belief that a certain VC firm “makes” a startup is nothing but borrowing conviction and assigning a level of credibility to that startup that doesn’t exist.

The best antidote is for an investor to develop a great magnitude of owned conviction on the startup, and be away of how the bias of borrowed conviction can suspend typical analysis of certain variables of the startup that would otherwise be held to a higher standard.

Founders should work hard to find investors that think deeply enough about their startup to develop their own conviction. Because the investors who forge a deep well of owned conviction about what you are doing and invest in your are the ones who will be your best investors in the journey.