After a long break, starting to write again. I have been journaling but not on the public forum for various reason which I’d rather not get into in this post. I wanted to write about the differences that I have observed in the venture investing vs every other investments. Fred Wilson, wrote a post a short while back comparing VC investing to Private Equity investing. You should read the post by Fred, it clearly articulates the value addition by VC’s who understand their role in the company building process.
I have been working with Founders and investing in Startups for a while now, and I think the fundamental difference in VC investing vs other types of investing is that a Venture Investor is not just an observer or someone who takes a bet and sits on the stadium and watches the game. A true venture investor plays a very important role of being a mentor, advisor and coach for the founding team. In order to make the transition to playing those roles the Venture investor needs to hone the skills of being a Servant Leader, i.e you need to be at the service of the founding team. It is very easy to give the answers but it is important to empower the founding team to become self-aware and find the answers. The other important observation is that Venture investing is a company building exercise, the sequence matters, strategy matters, team development matters at the early stage doing these thing correctly can either setup the startup to fly or crash and burn. Comparing this to other types of investing especially Private Equity investment, Fred says it very clearly
1/ Private equity is control investing. Venture Capital is minority investing.
2/ Private equity can’t afford to lose money on an investment. Venture Capital requires it.
3/ Private equity generates leverage from financial engineering. Venture Capital generates leverage from technology driven disruption and the opportunities that presents.
I am not sure if I agree that Venture Capital requires that you lose money. What can I say coming from the East, I just hate losing money. This may prevent my not making some deals but even experienced VCs pass on great deals, if you want to know more about that look at the Bessemer Ventures Anti-Portfolio. I can say without any doubt in my mind, the way a venture investor evaluates a deal is rigged with heuristics and biases, believe me I have been trying to become self-aware to notice my own biases and the heuristics that I use. As much as I want to say I understand how this world works, I have so much to learn. Like everything else where you want to become great at, venture investing is something that shows you how little you know the more you do it. For me venture investing is more than a way to make a living, my mission is to help founders win. Venture capital investing is one of the way you make that happen.
Making a venture investment is very easy but making a venture investment actually work for you and oh, make money of it is really really really hard. It takes a lot of effort, time and commitment, it is not like parking your money on an Index Fund or buying a bond (though you can lose your shirt doing either of those two things). What has worked for me is that I commit to working on the side of the Founder, I totally keep aside all my biases and become part of the founding team, I subordinate any ego I have to become a total servant to the cause. Of course I am not subservient to the founder or the founding team, I bring my experience, network and mistakes to the front and hopefully the founding team learns from my mistakes. It has worked really well. I felt really good when Brad Feld and Fred Wilson, two top tier VC chime to say that, it is the founder and entrepreneur that matter and VCs are enablers, although a very important enabler.
Another thing that I have noticed is that a good Private Equity investor does not necessarily make a good Venture Investor. The mechanics are different, the process is different and the skill sets are different. Being a good Private Equity investor does not translate to being a good Venture investor. The reasons are many, to name a few, Venture Investors need to have an open mind, a view of the possible future and be ready to change direction if something does not work. Venture investors need to have a perspective about the future paths, product development, marketing, sales and Business Development or scaling companies experience. If you see the 3rd point made by fred, it becomes quite obvious. In order to understand disruptions, you need to have a view of the future paths. Private Equity investors typically do not need to have that, they typically rely on their expertise in operations and financial engineering to squeeze every last ounce of juice from a business, which is not a bad thing at all but it does not work very well in venture investing.
I agree with Fred when he says
Many venture capitalists and venture capital firms go “along for the ride” with the entrepreneur and don’t do much to change the trajectory of the investment. Some VCs don’t even take board seats on their investments. There is a lot of talk about “value add” from VCs but often that is just for show during the process of winning the deal. The number of VCs who actually add a lot of value to their investments is much smaller than you would think.
I believe very strongly that the investors need to contribute, it is not the founders job to figure everything out, even if the founders want to maybe they don’t have the background to resolve all challenges in the company building process. VC investors and even Angel investors can really make a significant difference in the trajectory of the startups they fund. Startups are a team sport and if we extend the analogy a little further, the lead Venture investor or Angel investor should play the role of a coach.