Before I made the jump into Venture Capital (VC) two years ago, I had a pretty tainted view of the VC industry. It was mostly based on what I had heard from others, as I rarely was in direct contact with a VC (or VC firm) myself. My views were:
VC is a boys club - VCs tend to invest mainly in young males and often only in people they know, creating a a bro-community who only fund each other
VCs repeatedly invest in the same things - VCs keep on throwing millions on “yet another chat app,” not really innovation that could change the world or have real impact
VCs are emotional and biased - I was often told they were eccentric, moody, weird, irrational, subjective, emotional and highly biased
VCs are nothing but a check - beyond transactional value, what could VCs possibly add to the table?
VCs ask idiotic questions - I often heard from technical entrepreneurs that VCs ask weird and often off-the-topic questions
Yeah, my view wasn’t pretty. Even though it evolved over the years as I moved into more of leadership roles throughout my operational career and got a higher-altitude thinking, there was always a bitter taste in conversations amongst engineers or even founders about the stereotypical VC.
So is there any truth to the stereotype characteristics? Was any of it true? Unless you have tried being a VC for a while yourself, I can understand how it could certainly look this way from the outside. It is when you step behind the curtain that you can begin to understand why VCs do things they do. Read on to learn how my views have changed.
VC is a Boys’ Club
VC has certainly been male dominated for a long time. There are legitimate claims to horrible stories from the past. I can’t imagine what it must be like to go through something like that. However, in my own experience so far I have not been met by anything but respect, encouragement, opportunities, and appreciation since I joined ‘the club.’ Entrepreneurs have even (somewhat awkwardly) at times expressed it directly to my face how they would seek a diverse board and how refreshing it is to pitch to a woman in VC. Oh well, it may be part of their pitch strategy. What I hope my own positive experience is a testament to is that there is a shift and a new opportunity for not only women in VC, but also minority-led funding overall. There are LPs almost desperately wanting to invest in minority-focused funds and minority GPs. There is excitement in the room when there is a minority founder. Are these signs of a true mind shift? Perhaps also fueled by a generational one? Either way, I am glad to have had such a positive experience so far. We are not at true equality in boardrooms or venture decision making, but my view as of today is that times have started changing! (As a ref: for the first time there were more women than men on the rising star in VC list from Business Insider)
On the second note here, that VCs only invest in people they already know, there is some truth to that. The question to ask, however, is why? Put yourself in the shoes of someone whose job it is to write multi-million checks, on behalf of someone else, who in turn expects a certain return on investment. Add to that, if you don’t make that right choice, you won’t achieve the return and your future chances to raise funding for your next VC fund will become much harder. Now, if all else is somewhat equal, would you rather invest in someone you know very little about or someone whose strengths and weaknesses you know and therefore know how to navigate with and compensate for? It comes down to the risk aspect. Risk capital really should be called risk-minimizing capital. Where can I put this $X million to work, with the highest impact and return, but with the least risk? A VC fund’s obligation to their LPs (their fund investors) is to maximize the return. Therefore a sub goal becomes to minimize the risk of that return. Often when you talk about risk capital (i.e. venture capital) that second condition is forgotten or brushed over. Think of it this way: you have two opportunities with somewhat equal chances of a certain return, which one would you invest in? The less risky one. Hence, investing in someone you have worked with or invested in before, is slightly less risky than investing in an unknown or new entrepreneur.
Even if the known entrepreneur failed their last adventure, it is seen as a valuable experience of lessons learned, which would further help to reduce the risk. So yes, there is some truth to this view of VCs investing in the same entrepreneurs over and over again, because the entrepreneur is a known entity to the VC, and there’s sufficient knowledge of capabilities, limitations, and modes of operation on the side of the VC about the entrepreneur.
So what to do if you are an entrepreneur pitching to a VC that does not know you? Well my 2c would be to:
Focus on building relationships early with investors, to give them enough time to get to know you
Think about how you can make it clear what risks are involved, how you’re thinking about these risks, and to what extent they are manageable and how. Further, explore how you can mitigate risks overalls, e.g. if you are a first time founder, maybe add serial entrepreneurs to your advisor network; learn from similar companies that have succeeded or gotten funded; get detailed understanding of customers as basing your strategy on real scenarios is much less risky.
VCs Repeatedly Invest in the Same Things
This one is interesting. First of all, technology moves forward, so a data warehouse of 15 years ago is not what a modern data stack looks like today. One could argue that “doing all the same thing all over again” with X years apart is actually a good investment strategy. Especially since the buying processes, budget, know-how, and full executive understanding already in place, reduces many common risks of the typical startup sales cycle.
I think a stronger argument is, however, that the view is too narrow. You can’t just look at investments of “the same” nature as the entire universe of investments. There are just as many investments - maybe more? - in new and unthinkable products. One reason you don't hear about those startups is that they usually fail. To the point made in the previous paragraph above: unproven ideas, non-existent procurement processes, or no enterprise budget line items adds to the struggle and challenges of a startup and reduces chances of survival significantly.
Investors are Emotional and Biased
There are a huge number of VCs in the United States. One could argue that there are all kinds of personalities in VC, just by pure statistics. I think the reputation comes from what gets told. What is the fun of telling a story about a normal behavior, when there is much more click-bait material and likelihood of a spread by word-of-mouth in the odd ones out?
I don’t know how to approach this outside view in a data-driven way. Are we emotional? I think a good VC must have passion, EQ, IQ, and a strong analytical skill. When a new deal that seems like a possible fund fit and great opportunity comes in, we get excited, yes. But the process is a rollercoaster from there. In every due diligence we find negatives and positives. We may seem up one week, and down the next, it depends on what our due diligence digging has uncovered. There is a constant struggle to try to stay objective and we do so by grounding the excitement around a new opportunity in facts and data. I think VCs are on a similar emotional rollercoaster as the fundraising entrepreneurs - only the highs and lows are slightly different from the other side of the table.
VCs’ reputation as being biased I think is true to some extent. We are biased in the sense that we have experiences we tap into, to again reduce the risk of unknown. It is better to let an opportunity go, then to join a startup’s journey with limited domain know-how and the possible risk of leading the entrepreneur down the wrong path. Hence, we are biased in that we invest in areas we know, or with the experience we see we could contribute for a certain team or business model etc. That is better for the entrepreneur and the startup in the long term. We also make investment decisions as a team, and we try to have as different and diverse individuals and mindsets on our investment team as possible. We want as many different perspectives on an opportunity as possible. The risk is reduced when multiple team members debate an opportunity and whether it is the right one for the fund. However, that requires the VC investment team culture to be flat, respectful, trusting, and open, to get the true value of a team debate. I have heard about VC firms that are very hierarchical, so there may be more bias in those firm cultures as a result - that I don’t know. The debates are healthy as they shake each other out of bias with questions and perspectives. I’d say we try to fight our biases daily, while our past experiences also constitute great value and one of our strong tools for any “startup survival.”
VCs are Nothing but a Check
Some might think VCs aren’t really doing anything but waiting around for the CEO, exec team, and all the hard working engineers and startup employees on the ground to do the hard work. At the end they come in and comb home the money and often only think about themselves.
I would say it depends on who you, as an entrepreneur, choose as your VC partner. There are all kinds. Hands-off, hands-on, and anything and everything in between. I have seen VCs who step in as temporary operational roles when the companies in their portfolio struggle. These VCs tend to have fewer companies they work with, but a mindset and fund structure that aims for making every single one of them survive and thrive. There are VCs who are large organizations where the entrepreneur gets a check but never gets to see the partner signing it. A lot of services available, sure, but perhaps no deep connection nor guidance from someone who truly gets to know the company and culture over time, no consistency, and therefore not much commitment - until you succeed (much on your own). Only the strong survivors get the partner's attention. There are VCs like DNX (the VC firm I work at), who have a value set of connecting with the entrepreneur and sit in the same boat (or airplane) and support the entrepreneur in what he/she/they wants to do. For that to work there needs to be trust and respect in the relationship. A relationship must be built, as we will work together for many years. It is almost like a bi-directional hiring process of sorts. Our “daily job” (in addition to keeping track of trends, keeping our LPs informed and happy, and the continuous search for the next big opportunity) consists of portfolio support: making introductions, coaching, whiteboarding strategies, brainstorming, customer development, help with hiring, financial modeling, help with next stage fundraising … the list goes on. Being a CEO is a very lonely job and you need someone in your corner who has your back when you face tough times and need to make hard decisions, not only celebrate your successes. Someone who has the outside view on what you are doing and hence gives you invaluable perspective when you have blind spots. No one wins alone, and VCs (at least the ones like DNX :) ) tend to become the extended leadership-support team and a function that extends the network beyond that of the entrepreneur’s. The value of the network is underrated. It means everything when you hire, when you are trying to get a conversation with an enterprise, when you need experience from someone who has done what you as an entrepreneur has not done before.
VCs ask Idiotic Questions
OK, sometimes our questions aren't the most brilliant ones. Guilty as charged. But honest to your heart, if you were not an underwater mining or wind turbine expert you probably would too, no? It comes down to domain expertise matching and homework done ahead of a meeting - on both sides of the table. As a VC I may see 500 pitches over a few months (including demo days). I may select to take 15+ meetings a month. It is just impossible for me - considering I also need to support portfolio companies at a good level, and do everything else a VC needs to do - to prepare to an expert level for each initial pitch meeting. We often have back-to-back pitches (mixed-in with portfolio meetings). It is easy for someone on the other side of a video call to think “how hard can it be” or “what an idiot”. If you try that context switching for an extended time, I bet you too will start getting a bit challenged at times, am I right? If you ever feel frustrated, as a VC or entrepreneur, my best advice is to take a deep breath and switch on the empathy button! :)
A VC probably sees 100x more pitches over some time than an entrepreneur. After a while the patterns emerge (maybe this scene from the Matrix movie helps explain it). You get better and quicker to see signals if the entrepreneur has it down, is on top of their game, has a thought through a-z game plan from a ‘building a business’ (and not just words and a powerpoint), etc, or is still learning and practicing or haven't talked to enough customers. I am talking about beyond the pitching - can this CEO attract customers, partners, employees to the mission and hold his/her/their ground when challenged? Will their style and manners lead them to play in the next league of the game (and the next…) - enterprise navigation, competitive hardening, navigate sudden market changes, keeping a team motivated through hard times, hiring, and the strategy game of the next fundraising - that lays ahead? Do they have humility to take feedback or do they get defensive? Are they open to different opinions, yet stand their ground? If they can’t convert me into a believer, how can they convince the world?
Practice makes perfect. If you are an entrepreneur, have you ever experienced a off topic question? The same question asked again? Or perhaps a curve ball question? Or a completely unexpected change of tone or intensity in the meeting? It must feel frustrating or confusing at times. Then try this: explore the possibility that the intent is to see how you handle yourself. It might just be that the VC experiences something about you or your way to handle yourself as “green” or a “yellow flag” (again we know practice makes perfect). Often we like to double check our first intuition about you as a leader, and test your ability to handle difficult situations. As an entrepreneur you will have to navigate many: demanding customers or a team member that isn’t fully on the map, etc. My advice is to try to not get offended or think that the VC must be an idiot. The way you handle yourself under stress and how you navigate an important conversation is as important as the content you are presenting. Perhaps even more important in the long run, as the winning teams are based on the people in them and how they are able to scale, navigate obstacles and different kinds of people, play the marathon chess game that entrepreneurship in a way is - and continuously be high on energy and continuously resourceful. The team and culture and people skills, from what I have experienced myself, is as important as the product and the market timing. You want an entrepreneur to preferably be a good combination of EQ and IQ, although there are some outliers to this ‘rule.’
In conclusion
As I entered the world of VC, many of the myths I had heard have been debunked. As in any industry, different people with different values and styles exist in the VC world too. What’s important for the entrepreneur is to find the right kind of partner for the business they want to build. One could see it as a kind of business marriage and you have to date a few until you find the right one to match your personality, communication style, values, and end vision. How the VC world continues to evolve, along with my own views of it, will be interesting to explore ahead - I’ll keep y’all posted!! Now onwards towards 2023 and my 3rd year as a VC. Soon enough we’ll learn what that entails…