On sourcing, venture capital and loss ratios

I recently read a post from legendary VC Fred Wilson, “Loss Ratios In Early Stage VC”, which I came across after reading another one from Mark Suster: Why VCs Should Stop Trying To Be Perfect. VC’s don’t play by the same rules as the rest of us. They have to think about the quality of their investment but also about things like the motivations of those who refer people:

People have motives when they send you a deal. Sometimes those motives are positive (they really want the chance to work with you, they think you have unique skills) and sometimes they are less positive (their first-tier of “go to” referrals passed on the deal, they don’t want to write another check themselves, etc.).

Suster understands that it takes out-of-the-box thinking to invest in companies like YouTube. The VC game is certainly a complex one, but one of the necessary evils of venture capital is the cost of doing business when it comes to loss ratios. You can’t win by making every deal with the same expectations. It’s a numbers game that has a unique perspective that wouldn’t be acceptable in other lines of work.

Loss ratios

In Fred Wilson’s piece, the author highlights the necessity of having a relatively high ratio of investments that will not produce any ROI. So I immediately thought about the correlation between sourcing candidates as a recruiter (as in reaching out to passive candidates as opposed to people who apply directly) and VC Investing. Wilson puts it this way:

I just looked at the financial reports for a seed fund I have an investment in. It has a 42% “names” loss ratio three and a half years in. That sounds about right to me. I feel good about that fund. If it had a lower “names” loss ratio, I might not feel as good about it.

It is well know among sourcers and recruiters that you want to focus on quality over quantity. However, having a low ratio of candidates who get rejected early in the process is not necessarily a good sign. Loss ratios in sourcing, like in VC investing, can really be a good indicator of a sourcer or recruiter’s performance. We all know that all the candidates we contact will not be hired. Additionally, only interviewers will be able to determine if the candidate is a match for the role she/he is interviewing for. So you have to take risks in that respect.

Having candidates failing at any given stage of the interview process can be demoralising (and even more at later stages), especially if you hold your hopes too high. In all honesty, I must admit that I was sometimes trying to have the least amount of candidates in my pipeline to avoid that frustration — and this was something I only realised about a year ago, years into my career.

If sourcing is your role, do you agree that you need to have a significant loss ratio?