The Business of Venture InvestingBy Hernan Fernandez | Wed, 02/17/2021 - 13:10
Venture Capital has always been considered a mostly financial activity. True? Who could blame someone who answers yes to simplify the asset class, as it does have “capital” in its name. The reality is that the initial input and the final output of a VC fund is indeed capital, but is it really a “mostly financial” activity?
Think about the Venture Capitalist’s job for a bit. In a super simplistic way, you could think that he/she screens hundreds of projects, interviews tens of founders and does due diligence on a handful of opportunities to choose one investment. Most certainly, a financial background comes in handy when doing the number crunching and analyzing the lifetime value over customer acquisition cost ratio to understand how sustainable a business will be in the long run. From there, you only need to put the numbers into a master excel spreadsheet and let the formulas do the trick, right?
To be honest, a good Venture Capitalist definitely does something like this, but only as part of a far more complex decision-making process that involves the least objective of inputs: people.
Going back to my super simplistic example above, how does a good VC fund manager get to receive hundreds of pitch decks? The answer is that he/she works hard to get his/her name into the ecosystem and have a public profile. Attending events, keeping up to date with industry newsletters, surfing Crunchbase, managing his/her LinkedIn account, and being nice to cold emails is just the start of this process. But let’s face it, good or hot leads are rarely (and particularly at an early stage) never brought to you by an investment banker or a fellow fund that is NOT investing into the opportunity. And this is where good VC fund managers start working their magic.
Good venture fund managers have to network themselves into the most promising deals, and this is not a full-time job, it’s a full-life job. You have to constantly remind the founders in your portfolio that you are looking for the next big idea. You have to schedule regular meetings with your investment-active limited partners to compare notes and bounce around a couple of names. You have to remind your peers and colleagues why you are a good co-investor into their good deals. All of this takes time, discipline and constant love for what you do, as this can potentially happen at weddings, bars, events or parties (at least in a pre-COVID-19 world). It also takes humility to read the signals of stellar founders, and many times you should be intrigued about why an amazing team is leaning to an idea that you don’t find that attractive rather than jumping to a great idea that your gut feeling warns you about regarding the capabilities or commitment of the founders.
All of this is easier said than done. To achieve this degree of trustworthiness by your invested founders, limited partners or peers, among many other stakeholders, requires an immaculate track record of being a team player and someone who really, in practice, adds value. This is what gets you beyond the pitch deck reception phase, to where the real action is: interviewing founders. Good founders are usually good storytellers, but watch out, as good salespeople also excel at this.
In my experience, it all boils down to understanding if the problem that keeps you up at night as a founder is big enough as a market and if you are getting the right team to tackle the opportunity. The lack of a clear answer to some questions at this point says a lot about who you are as a founder. If you do not have a co-founder or a strong team with decent equity, I might have second thoughts about your leadership skills. If you cannot sell the dream to other dreamers, then you need the money to hire mercenaries, and I would be concerned about when the next unicorn will be looking at your startup to poach talent.
Coming from my angel investment days, one key question I always ask is who took part in your “friends and family” round. The answer to this is critical, in the sense that it is not about the amount of money but about the specific task of asking your most trusted networks for support and backing. No money from grandma, former boss, soccer buddies, coworkers or business school classmates might be telling me that you’re a gambling drunk who is going through a nasty divorce and does not honor his/her dues. As Venture Capitalists, we like to see our projects be like ham and eggs. VCs are the chickens that provide the eggs, and we want to see the entrepreneurs be the pork putting its skin (literally, in this example) in play.
Once you have done the due diligence, it means that you have the data to trust your gut instinct and make an educated decision (or a justified mistake). It probably takes a meeting with your fund partner and presenting it to an investment committee, but you need to make sure that whatever the outcome is, you can bank your reputation on it. You have to make sure that you’re making the correct decision given the team, time and dynamics that you are analyzing at that moment. More often than not, we will get it wrong, as that is the nature of this industry, but when we do, we need to support these opportunities with all we have.
In that sense, good invested founders become family to a certain extent. As a VC manager, you will become an ally, a brand ambassador, a scout, a mystery shopper on competing products, a cheerleader, an unlicensed psychiatrist, a bank executive, a marriage counselor, a shoulder to weep on, among other things (I personally have been all of the above for at least one of our founders at Angel Ventures). It is your job to make their journey easier, as both you and them are being paid to achieve the same objective.
So, there you go. The next time somebody applies to a VC job pointing to only the financial skills, point him in the direction of private equity, investment banking, consulting or something along those lines. If you want to work in Venture Capital, you need to be a human being who actually understands the complexity of people and make a self-assessment on how and why you’re capable of helping them succeed, well beyond when the money is allocated.