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. Reporting out in batches of five. Here’s Part II:
While the venture and tech community is incredibly collaborative, VC is an inherently lonely role. To succeed, you have to be comfortable taking big swings and doing so often means going out on a limb and holding your conviction when no one else is there with you. Plus, it takes extreme patience to learn if that conviction was warranted, because the path to a company being a venture-level success is anything but linear.
We often tell our founders that in the earliest stages of a company, you’re living day to day. As the company scales, the role of the founder can shift to thinking in months, and then years. But as a VC, you truly have to think in decades. So amidst the loneliness and the waiting, that’s why the team you surround yourself with as an investor is essential. I feel incredibly lucky at Inspired that we have the psychological safety to encourage those standout opinions and are comfortable sitting in the discomfort for long periods of time. [Alexa von Tobel, Inspired Capital]
[Hunter: I find that venture partnerships play a big role in amplifying or mitigating the feelings that Alexa describes. Dysfunction, mistrust, and unhealthy internal competition can all prevent a VC from bring their best selves ongoing to an investment. And quite often, this spills out of the individual and becomes a negative for the startup as well.]
It’s a sales job! From the outside, VC looks like a glamorous gig – you get to prognosticate about technology all day and write million-dollar checks. The reality is you need to be constantly working a funnel, building and strengthening relationships, nurturing deals until they close, etc.
Paper marks are deceptive! Not only can valuations rapidly outstrip fundamentals and become artificially high really fast, they’re also deceptively stable. Unlike a public stock which gets revalued every day, the intermittent nature of startup valuations means that it becomes all too easy for investors to develop a false sense of security about their portfolios.
It’s still a macro business: The things we choose to invest in, the startups that get funded most easily, and the ability to engineer exits are all highly contingent and driven by macro forces. We’re not held to account on a daily or quarterly basis like public stocks are, but we’re kidding ourselves if we think we’re immune to their impacts. [Micah Rosenbloom, Founder Collective]
[Hunter: OMG yes. I tell new and aspiring VCs to not believe the ‘content marketing’ version of our job. And to never forget it’s fundamentally sales and investment management. Many of us aren’t in the industry solely for those reasons, but if you forget that they’re essential skills for outperformance, you are likely to experience pain and disappointment.]
I wish that founders around the world understood the degree to which Silicon Valley (not the USA) is the global outlier when it comes to fundraising. There is a pervasive belief amongst founders that goes something like this:
- Investors here don’t take risks
- Investors here don’t back early companies
- Investors here don’t lead rounds
But…
- U.S. investors take risks and move fast
- U.S. investors back ideas on napkins
- U.S. investors don’t care who else is in the round
In fact, the experience of founders in Manchester, Montreal and Memphis are far more alike than they are different (at least, according to the numbers). The dynamics amongst Silicon Valley VCs and between Silicon Valley VCs and founders are global outliers due to the unique competitive dynamics that only exist in Silicon Valley. (Also, when I was a founder I definitely needed more than a napkin to raise my pre-seed round!) [Chris Neumann, Panache Ventures]
[Hunter: I wonder, in Chris’ experience, whether founders and investors who have spent time in Silicon Valley, but they return/relocate to other geos, bring back the ‘SV’ mindset or do they return to local norms? How long do you need to experience SV to be changed by it?]
I gave this advice to a couple entrepreneurs once that were killing themselves trying to find away to keep their company from going to zero.
Most VCs are playing for power-law outcomes—the one or two companies in a portfolio that drive most of the returns. Most investors I know also care personally for the founders they invest in. If an early stage company is going to fail, we would rather see you quickly move on to the next thing that brings you fulfillment than agonize for months to get us pennies on the dollar in return for spending years of your life at an acquirer that you aren’t excited to join. [Victor Echevarria, Jackson Square Ventures]
[Hunter: Yup, and at the margins, some of these outcomes are going to be decided by the emotion of the situation, and previous behaviors. If a founder has exhausted all of their goodwill, I find investors less likely to be generous in these sorts of situations. Not necessarily punitive, but more likely to be exacting (or maybe extracting) in making sure capital is returned or all offers for the assets are considered, even if it’s causing stress and anxiety for the founders.]
It’s way easier to get divorced than get someone off of your board. It can seem like speed and/or price are the most important things to optimize for in a fundraise. This makes sense at face value: a) fundraising ranges from being a distraction to a colonoscopy + root canal, b) dilution sucks, and c) they are quantifiable attributes, easy to compare or rate good/bad. But, you have to live with that investor (even if they are not on your board) for years afterward.
An excellent board member is a good thing to have, a terrible one can literally kill your business. The risk is asymmetrical. Even the best board member in the world can only do so much, but a bad one can hold up or nuke a future fundraise/acquisition, be a constant source of aggravation, and even lead a charge to fire you. Plus, your execs, the rest of your cap table, and your board often will have to deal with this person. The fact this industry is small is a feature, not a bug. Reference the hell out of people and ask yourself you really want to work with them on your most important endeavor for literal years of your life. [Roseanne Wincek, Renegade Partners]
[Hunter: My partner Satya always reminds me, if it’s weird during the fundraise, it doesn’t get better after. This is true about investors and founders. If the vibes are off, be wary.]
Part I: Andre Charoo, Bill Clerico, Ryan Hoover, Amy Saper, and Dan Teran.
Part III coming next….