I asked some investor friends to share, as the title suggests, one thing they wished people better understood about venture capital. There were no ground rules other than to specify that ‘people’ could be founders, politicians, LPs, etc and that it would be default attributed but anonymous if they desired. Here are the first batch of responses (with some of my reactions). More to come in batches of five answers each post.
The beautiful truth about the game of VC is that it consistently rewards difference. This difference comes from the outlier returns driven by backing founders who are different. Of course, difference inherently carries risk. Despite this truth however, institutional LPs aren’t incentivized to take that risk. I wish the structure behind institutional LPs were more conducive to backing GPs who are different. Because, in turn, these GPs will back more founders who are different, which will lead to more outlier returns, which ultimately leads to more products and services that change the world. [Andre Charoo, Maple VC]
[hunter: 100% agree. The majority of established venture firms are evolving into large asset managers, and this creates space + opportunity for all sorts of new strategies, the best of which will absolutely outperform, on a multiple basis, the entrenched. It’s part of the reason we started Screendoor, a fund of funds aimed specifically at new VCs. And we’re proud backers of Andre/Maple.]
There are many ways to play the game in VC. Knowing your strengths and which game to play is critical when managing a fund (and more broadly, any professional endeavor).
Some investors get pulled into different games, perhaps unknowingly, through their career as a manager. One of the biggest “traps” is in escalating fund sizes. Deploying a $10M fund is wildly different from operating a $100M fund. It can be alluring to raise more capital in each consecutive fund, but doing so often requires the fund to deploy larger checks, shifting their position as a collaborative investor to competitive player among peers. Now they’re stuck fighting to secure the lead position in a round and sourcing companies earlier in their fundraising cycle. Some will succeed in this transition. Others won’t. [Ryan Hoover, Weekend Fund]
[hunter: The gravitational pull of venture is to grow each fund larger than the last. And it’s often to the detriment of everyone involved, but especially to the detriment of founders and LPs. I’ve been a personal LP in every one of Ryan’s funds and part of what has always impressed me is his understanding of these tradeoffs in strategies and incentives.]
There is a large contingent of the venture ecosystem that believes “the best founders don’t need help.” In my experience as a founder and as an investor, this is not true.
The road to building a large business is paved with opportunities to kill your company through inexperience. This is especially true in the early days. While it is not the job of the investor to build the business, preventing terminal mistakes can be there difference between a 0 and a $1B+ outcome.
In reality, everyone needs help. Whether or not investors are qualified to provide it is probably the right question for founders and LPs to be asking. [Dan Teran, Gutter Capital]
[hunter: We backed Dan when he founded ManagedByQ and are personal LPs in both Gutter funds, so I’ve gotten to see him on ‘both sides of the table’ so to speak. My POV here is that we seek to invest in founders who have an outsized chance of succeeding without our help, and then try to increase the probability and velocity of their success with our assistance. As Dan also notes, self-aware uninvolved but ‘do no harm’ investors are much better than those who offer help that is either (a) inconsistent, (b) incorrect or (c) self-destructive.]
Venture capitalists arbitrage risk by raising capital from risk averse institutions and using it to back founders in highly risky endeavors (with potential for outsized return). This requires a sometimes difficult translation – and so most firms end up focusing on one vs the other. But if you become too LP-centric, you build a soulless asset manager that turns the best founders off. Don’t learn to speak LP and you’ll stay a small fund forever without the ability to be a significant partner to founders. [Bill Clerico, Convective Capital]
[hunter: So there’s clearly a ‘bias’ in the sample set here, caused by my own interests and networks, but I think it speaks to the mindset of those VCs who decided to start their own firms, versus those who joined existing large shops.]
The frequently overlooked importance of “founder-investor fit”
I’ve been an early stage venture capitalist for five years at two very different firms, Accel and Uncork Capital, and have gotten the chance to collaborate and co-invest with VCs at dozens of other firms across a large range of AUM, stage focus, sector expertise, and portfolio support. One element of venture capital that I don’t think is discussed or appreciated nearly enough is “founder-investor fit”.
Founder-investor fit involves ensuring that a particular VC (both the individual partner and their firm) aligns with the specific needs of a founder, as not all investors are the same. What many founders don’t understand is there’s no singular ranking of the “best” VC for all types of founders. It’s important to think deeply about what level of support you’re looking for, what specific activities you’d like involvement in, and what kind of relationship you want to build with your investor. My advice is to conduct thorough reference checks on potential investors (mainly with founders they’ve backed), understanding what other founders sought in their founder-investor relationship, and how the investor in question delivered based on those expectations. Some founders may prefer a hands-off investor with a large personal brand, others may want specific help planning their GTM motion and intros to key customers. It’s crucial for founders to identify what they need from a VC, and reevaluate these needs at each funding round. [Amy Saper, Uncork Capital]
[hunter: So true, especially at early stages of a company. I also believe that many VCs aren’t incredibly self-aware about what type of founders they’re best suited to work with – either because they don’t want to ‘disqualify’ themselves from any portion of potentially successful outcomes; not many venture firms provide great mentorship, feedback, 360 degree evaluations; and the dynamics between founders and their investors often don’t allow for honest open conversations.]
Another five to come soon!