Design + Venture Capital

A Case for Designer in Venture Capital

John Maeda from Kleiner Perkins is one of the first to make a case for a designer in venture capital. He showed that a designer can provide a valuable perspective on evaluation process, as well as make difference as an adviser to portfolio companies, focusing on experience, product/service and design quality.

Seda Evis believes that the primarily value of a designer in venture capital comes from the main question a designer asks: does it really address the user need? Despite a common misconception, design is not purely about how to shape things and choose colors. In reality, it is a discipline that brings multiple perspectives together early on. Seda says that this high-level thinking is what is lacking in non-design education, which is particularly salient in fields such as engineering and business. Because design methodologies rely on gathering information from many sources, they help to arrive on a future vision. In her view this approach will continue to spread across many industries: “ten to fifteen years ago, designers were hired just to draw [i.e. do artistic work]; now, they are hired to solve problems and build solutions by synthesizing information.”

When she only started working with designers, Estella Hernandez found it fascinating how effective they are at mapping problem’s components and finding relationships. “Designers are very hands-on and they approach problems from a perspective that I couldn’t see”. In her view, user-centric methodologies and rapid prototyping allow for more precise evaluation and more efficient operations and communications.

From Jeff Veen’s experience as a journalist, editorial design schedule is iterative – it is very similar to a lean startup. Interestingly, he noticed that application years before it became a widespread concept in the startup world.

Ben Blumenfeld says: “like in any business, design is a "force multiplier" of key functions. We use design to design better founder experiences, to communicate effectively, to raise money, etc. We then also teach our companies how to do these things which is key for them, especially since many of them are in spaces with poor design.”

How Designers Can Contribute in Venture Capital

Due to their hands-on approach, creativity, high-level thinking, user-centric approach and effective problem-solving methods, designers can be valuable in almost every aspect of the business of venture capital. On the portfolio side, they can effectively assist with the product, marketing and team building. On the investment side, they have a unique way to approach evaluation process of the product and the team. Essentially, a design partner brings in yet another filter that adds to the depth of the investment evaluation. Finally, design methodologies can be used in fund management, viewing it as a service that should provide the best possible experience for its stakeholders. Designers can be involved on many levels: as partners, designers-in-residence, associates, or event brought in as in-house design consultancies.

Product

Every time I talk to a venture capitalist, the most obvious case for a designer in VC that comes to their mind is the portfolio side consulting. All design and VC professionals interviewed for this report agree that user-centric methodologies such as observational research and shadowing are some of the most efficient tools that could be used both in product development and venture capital. Observing how customers use a product, especially early on, allows to catch bottlenecks and trouble points in the usage process and discover potentials for new innovations. “A lot of times, people don't know what they want until you show it to them.” Oftentimes, I have heard this famous quote by Steve Jobs being misunderstood as a case against user-centric approach. In reality, this quote is an alternative interpretation of revealed preference theory, pioneered by economist Paul Samuelson, which states that it is not what consumer says but what consumer does that reveals what they really want [8]. Steve Jobs did not design ‘random’ products hoping that they will work with the public, neither did he heavily relied on the user interviews; instead, he was good at observing how people use technology and what problems they face and designed products around peoples’ unrevealed needs. With such an approach, he was decades ahead of his competition.

When I was building an early interface for Symbol*, I conducted human-computer interaction research at DDB Worldwide office. I noticed that strategists would spend an enormous amount of time creating presentations. Sometimes, it would exceed the amount of time they spend on research and analysis itself. When I began asking people in the office whether PowerPoint was a sufficient tool for them – most of the employees said that they were quite satisfied. However, when I started observing their workflows and assigning specific tasks to identify main bottlenecks, I heard repeated dissatisfaction with numerous features and interface elements. Most users cannot express their problems. It goes without saying, they cannot envision an alternative. Designers, on the other hand are trained to do exactly that – identify problems and build better solutions to improve the experience. This skillset can be translated into venture capital in many ways.

As a product designer, I need to think strategically through every step of the user experience of a product. How do users discover it? What are the entry points? In which situations would they use it? How do they achieve their goals by using it? How many clicks/taps does it take to access a specific feature or perform a specific task? I believe that these questions are particularly valuable in the business of venture capital. It is obvious that not every startup has an expert on user-centered methodologies as a founder. Early-stage companies, in particular, do not always have the capabilities to properly test their products or may struggle with optimizing certain features. While large corporations are buying design studios to turn them into in-house innovation labs, startups cannot afford that. Neither they can afford hiring an expensive design consultancy such as IDEO or Critical Mass. Since assisting startups with getting to the next investment round is as important as finding good deals for a VC fund, there is an intrinsic alignment for a VC to have a designer or an in-house design consultancy ready to troubleshoot portfolio company’s product, bring a fresh perspective into the process and teach how to leverage user-centric methodologies to increase the quality of the product.

Today, is a particularly good time to add a designer to a VC team because this idea is still relatively novel, yet design methodologies have already proven their effectiveness. In both The Founder’s Dilemmas [9] and Venture Deals [10] authors advise entrepreneurs to go with ‘smart money’ deals (i.e. investors who contribute beyond the financial capital). With a low adoption rate, having a designer in a fund could serve as a competitive advantage and differentiate the fund from the others, which could result in a higher chance of getting that ‘hot deal’ that many funds are competing for. Most importantly, brought-in design knowledge will increase chances of a portfolio startup to succeed because, according to the data from the Design Management Institute, design-driven startups outperform their peers by 228%. [11]

Just like Ade, Jeff suggests that design should become an essential part of engineering curriculum since these disciplines are very symbiotic. Particularly, he finds user experience research to be the most useful. Because engineers are not very good at making a product for the people, Jeff believes that it is highly beneficial for a company to have a designer in the lead of the company – to establish a closer connection with the end-user. That is the reason why he advocates for designers on the portfolio side in venture capital. Jeff says that Google Ventures (GV) encapsulates what does it look like to have a design team in a VC fund. Its primary role is to be educational and teach startup teams design tools and methodologies to speed up the innovation process. They give companies an insight into what user-centered design really is and how prototype quickly with it. The GV design team teaches portfolio companies how to solve problems with its powerful ‘sprint’ methodology, which can be explained as moving from ideation to concepts to testing in five days. Most importantly, designers teach startups how to do that for themselves. In this way, a VC should not consult or solve startups’ problems but provide a learning experience, and GV is very successful with that. Yet, prototyping and testing are very specialized skills that not many people have, so, unfortunately, they not as widespread in venture capital as they should be.

Ade points out that design and venture capital share one important trait – they are both about need finding. Prototyping, in his view, is the most precise way of need finding, and designers are best at doing it. The medium of an investor is time, and timing is very important. If in-house process is fast enough, the innovations can keep up with the market. Silicon Valley giants such as Google and Facebook adopted this strategy years ago; for example, to test their newest features, they send their prototypes to selected beta-testers. “Prototype, test, iterate – is the formula that leads to alignment.” Ade is a proponent of in-house design teams. He says that a strong design culture can help people in a company understand what they are actually doing and see within the firm what its entity represents (i.e. to check whether they are all on the same page).

By taking advantage of her design background, Estela makes Arrowhead Fund act as a design strategy consultancy, working with companies when they have gaps, struggle to define value proposition, or execute marketing. Thus, she tries to help companies to get to the point where they are investment-ready. She thinks that one of the main benefits of design is that it is very ‘hands-on’, and people who come from design background are really good at building things and understanding how things are built.

Being a designer myself, I agree that we, as designers, are focused on understanding the outcome of our work as quickly as possible. No matter what industry we are operating in – printed matter, architecture, interactive design – it is entrenched in our way of thinking to prototype at every stage. This approach is particularly beneficial for early stage companies that still have more variables than constants, and it is in the best interest of a VC to make sure that its portfolio companies are moving in the right direction.

Investing and Diligence

On the decision-making side, design methodologies allow to closer evaluate an investment and provide a better understanding of a product. Usually, a person who designs products approaches things drastically different compared to a person with a business background. Ade says that “from investor’s perspective, you need to see the product as close as the user sees it.” – that is why user-centric approach is particularly valuable.

As a designer, I tend to reverse-engineer solutions and think about the reasons behind particular decision. Since design strongly emphasizes justifying every decision made in the process, this approach can reveal weakness, or advantages that were not apparent from the very beginning. After all, to determine product’s success it is important to have an educated answer to a question: does it satisfy user’s need? With an experienced product designer in a fund and test groups available for observational research, it is possible to get a much better understanding of the product and its real-life use scenarios before handing a term sheet. It is also much more difficult to deceive a designer with a good-looking but vapid prototype. Essentially, as Seda framed it, design serves as yet another filter to the evaluation process and adds to the depth of analysis.

Seda believes that designers can effectively adapt their tools to investment evaluation. In her view, observational research and shadowing are game changers, compared to traditional focus groups, A/B testing etc. She agrees with me that most of the value hides in the ‘unrevealed’ preferences of the consumers. Seda describes design approach as “getting out of the office and assessing people, businesses and products as closely as possible.” By adding customer behavior analysis to the formula, investors can discover intangible things that cannot be revealed by users through surveys or interviews, making a big difference in decision making. Aside from traditional due diligence, Seda suggests that investors should identify “where does a solution needs to exist where it does not.” From her observations, investors tend to communicate within homogeneous groups of like-minded individuals. Instead, it is important to gain a deeper understanding of what people need and want (i.e. what will make their lives better) beyond investor’s peer groups. In Seda’s view, evaluation of a product from a user perspective reduces the risk of an investment.

When asked how does designer's thinking differs from that of VCs with more traditional backgrounds, Ben explained: “We probably approach companies with more creativity and openness to possibilities of what something could be. The flip side is we also need to make sure we're very analytical and data driven as well to understand the fundamentals. Design is all about understanding a problem and building a solution so we use the design process to design our decision-making framework and also to learn about key spaces.”

Estela learned her first design lessons from her MBA program, in which students were taught to integrate design thinking, a trending concept of that time, into business strategy. In particular, she adopted an emphatic and personal approach – she prefers to have personal meetings with entrepreneurs before she would start with a due diligence process or present a deal to the reset of the team. As she runs Arrowhead Fund, she wants to see from the inside how entrepreneurs think, how they solve problems and how they understand the landscape they are operating in. Most importantly, she wants to see how entrepreneurs adapt to the customer feedback. From her experience, companies that can adapt and factor in users’ needs are mitigating risks. It is important for her to know whether the team is coachable and she wants to understand the team dynamics and overall alignment. Estela says that because, generally, designers are good observers, they are very perceptive, and they tend to be very good at seeing dynamics within a team. She thinks it is critical to observe how all the members of a startup team work together and understand relationships inside the team. From her experience, not too many venture capitalists are actually good at observing behavior, hence, it is a rare and valuable skill that designers can bring in. “Designers live in the future. They are better at identifying patterns and predicting what users will need in 1, 2, 5 ,10 years into the future.” Estela claims that designers are good at seeing a big picture and consolidating all the pieces of a puzzle to see what is trending and what will be trending. One of the most important things that design teaches is to factor in for customer behavior, which, in her view, is increasingly important in venture capital investing.

As a design partner, Jeff looks for a strong design leadership and a product market fit. He says that investors should be good at understanding a connection between a set of things that entrepreneurs are going to build and a set of needs that the audience has. “Having me at the table helps to see future roadmaps and discuss future projects in a way it would be impossible without a designer.” Jeff tends to spend no more than 30 minutes on financials and formal details; in contrast, he spends a few hours thinking strategically and trying to predict what are the next steps in the development of a company and how company’s product/service is going to fulfill the need of the users. At True Ventures, when evaluating an investment opportunity, they are looking for someone in the position of leadership (i.e. one of the co-founders) who has a grasp of user-centred methodologies, and having Jeff with his product design background helps the fund to identify that. Personally, Jeff finds companies that understand how to build with a user-centered methodology early-on to be a little bit less risky. Although he admits that just having a designer on a team is not a key to success, yet, a competent designer as a co-founder somewhat de-risks the investment.

Many top financial firms, including major banks and hedge funds, are buying design studios [12]. One of the reasons is that the vast majority of clients are using smartphones and banks need to provide the best possible mobile experience, which can be achieved through thoughtful interface design. Another reason is a need for a better data visualization. With ‘big data’ getting traction, the last few years are defined by an overabundance of information. However, for data to be useful, traditional collection and analysis are not enough – it should be represented in a readable way. As Ade describes it: “design allows to connect the dots to extract the signal out of the noise.” Data analysis and visualization is crucial in many fields such as banking, corporate finance, government, defense, medicine, education, etc. Just as traditional financial institutions, venture capital firms, particularly the late stage ones, have overwhelmingly many data points. By increasing readability and ‘getting rid of the noise’, designers can make data immediately accessible to all stake holders, which, according to the fluency of choice theory by Nathan Novemsky [13], should lead to a better, more informed decision making.

Although design tools are not created for investing but to design a better product – Ade says – they still can be adapted to use in venture capital. When it comes to investing, Ade believes that a successful company should satisfy three requirements: feasibility – does it work? viability – does it make money? desirability – do people actually want it? The latter involves both communication (marketing) and experience design. “If you are not a designer and I show you five products, how would you tell which one will sell?” In The Business of Venture Capital, Mahendra Ramsinghani lists marketing skills of a team as one of the top three aspects that VCs fail to asses [14]. Designers have a better understanding of what makes products desirable, thus they should be better at picking ones that will sell. In the past, VCs were mostly hiring marketing people for this, while designers were not seemed to be critical. For the past few years, however, traditional marketing is losing its grip, while customer experience design gets the upper hand.

Marketing

Generally, people are risk averse, and a new product poses an additional risk. One of the main roles of an entrepreneur is to persuade users to take that risk and to adopt the product. In Ade’s view, if the persuasion part fails, the product is dead on arrival. “Medium of an entrepreneur is storytelling, thus entrepreneurs design social movements.” One of the functions of design is to persuade through means of usability, aesthetics and communication.

Ade says that the mass adoption of the Internet, particularly through mobile devices became the breaking point in marketing. “In the early days, a bazaar was the main marketing platform: it was about shouting as loud as possible to attract attention. With the introduction of a supermarket, in which sales people do not interrupt a consumer, products could only speak for themselves and therefore sell themselves. Television, however, made marketing go back to the times of bazaars. In the age of the Internet, things are selling themselves again.” Before the Internet, the only feasible way to sell a product was to advertise through TV stations, billboard companies, etc. Today, as people became comfortable with online purchases, a mediator is no longer essential; instead, the product speaks for itself. Hence, it is crucial that design communicates what the company and the product are standing for. For this reason, both product development and marketing methodologies have also changed. Back in a day, to create a product companies did focus groups, surveys, etc. Now, the most innovative companies are emphasizing user experience and user-centered design. As the Internet made sales and marketing more direct, the most important question is whether the customer likes the product or not. So, design moved from being a subset of marketing to the forefront of marketing itself. IKEA’s former design chef shares Ade’s view on this: “if you work with design and communications in the right way, that would be the best kind of marketing, without buying media.” [15] Form Ade’s perspective, in today’s economy, marketing on its own is not that important – designers need to learn marketing and marketing people need to learn design because design methodologies allow for a more direct connection to the end-user. Both of us believe that it is easier to move from design to marketing than wise versa because design training is generally more demanding and vastly relies on years of experience.

To summarize, designers are usually better at predicting desirability of the products. In a VC fund they can help portfolio companies to build a desirable brand – which on its own is capable to create a monopoly, according to Peter Thiel [16] – and to establish a strong design culture. From a fund management perspective, in an industry where VCs compete for deals, a strong brand can benefit a fund, which can be achieved through customer experience design.

Fund Management

Estela describes a venture capital fund as a system where relationships among the board, fund management and entrepreneurs need to be managed. In her view, design allows for system thinking, specifically looking at a fund as a system. “Designers are great at system thinking: they understand how each component relates to the others and how these components interact with each other – that is the key to managing a VC.” Estela has a unique experience managing a fund in New Mexico that exclusively invests in New Mexico-based startups. Because she has much lower deal flow than funds on the West Coast or the East Coast, she has to come up with creative strategies to find deals. Many funds that have a high inflow of applicants not often think of a fund as a user-centric system. Estela believes that a VC fund, from a management perspective, should be user-centric in relation to entrepreneurs. Her point of view is very similar to that of Fred Wilson – co-founder of Union Square Ventures and one of the most successful venture capitalists – who prefers to think of a VC fund as a service provider to an entrepreneur [17]. Estela says that it is important to check in with entrepreneurs and understand more about the internal structure of their companies and see how things are working together – what is going well and what problems do they face. From her perspective, design methodologies could be used to research how communication between a VC and an entrepreneur occurs and to find ways to augment it.

In her fund, Estela improves the process of management with design. With a low deal flow, it matters a lot to her fund to be as efficient as possible and to provide the best possible ‘customer’ experience to entrepreneurs. She finds a design technique of splitting tasks or systems into blocks that can be improved to be particularly efficient. With only one major co-working space and relatively low spread of entrepreneurship, New Mexico has almost no startup infrastructure. For this reason, her business involves multiple stakeholders such as politicians, big businesses, academic institutions, which means there is more relationship management than in most VC funds. Estela’s job is to create alignment among those stakeholders to improve the startup ecosystem in New Mexico. Estela cited a fund in Kansas City as an example of successfull application of user-centric approach. The management of the fund found out that a traditional VC model doesn’t work in Missouri, so they needed to come up with a new paradigm. Managers of the fund spoke to stakeholder in their community to tailor experience to their needs and address their issues. Through prototyping and iterating they were able to build what specifically work for their community. As she is preparing to launch funds two and three, Estela uses a similar approach. She analyses what was and was not working in the fund one from a user-centric perspective to address that in the consecutive finds. Design methodologies, especially prototyping, also help her to design more impactful educational events and boot camps, which she heavily relies on to build a community and increase interest in entrepreneurship.

In The Founder’s Dilemmas, Noam Wasserman states that the best startup teams usually have founders with diverse backgrounds [18]. Jeff Veen shares this opinion: his idea is that teams should include an interdisciplinary mix of people. Instead of having separate narrowly specialized teams to work on separate, small, interdisciplinary teams should solve problems together, bringing their unique points of view into the process. In his view that allows to iterate rapidly and test what works and what doesn’t. I think the same paradigm should be applied to the VC fund management, and designers can add to desired diversity with their unique input that is radically different from that of business people and engineers, who traditionally comprise VC teams.

References:

1. A chat with Jeff Veen, Design Partner at True Ventures, on How a Design Expert Views Investments, Carlos E. Espinal, Medium.

2. Simon, Herbert A. "The Sciences of the Artificial". MIT Press, Cambridge, Mass. Print. 1969. pp. 130–131.

3. Definition of design. SVID.

4. So, what is design anyway? Todd Olson, Medium.

5. Five+ Types of Design Methodology, John Spacey, Simplicable

References are not exhaustive for the purpose of this assignment.
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