5 lessons from 5 years in venture capital
After running companies for over a decade we jumped into venture capital back in 2017 with the launch of our family fund.
Now 5 years later, we have seen successes and failures, collected valuable data and learned important lessons. Just when we are about to embark on the second half of our 10 year journey we find it important to write down some notes to reflect.
Tough but rewarding job
I’ve listened to over a thousand founders with their pitches over the years. Doing that instills a lot of patience as we know only a very small % of companies will be suitable for us. ‘No’ has become my new favourite word.
It’s (fairly) easy to spot the companies that likely won’t get very far, it’s extremely difficult to spot the ones that will succeed (given that you even have exposure to them).
That’s the reality of venture capital and it takes a bit of humility to accept this reality. Once one has taken a humble position there’s a couple of important additional lessons to learn. Lets get into those…
5 lessons for the road
Your influence on companies and their founders is minimal
Most founding teams have been working with each other for a while and will (hopefully) continue to do so. They are in the ‘trenches’ together and you are not fighting their war with them.
At some point in their journey they decide to take money from you to continue and fight the battle. And while you can likely add a lot of value during a certain period of time by giving introductions and advice, there will be an expiration date where you need to step back and let founders continue on their journey.
Not realising this on time can create a sour relationship, or worse.
Experience matters and the best companies out there don’t need you
Good and experienced founders know what they want and how they can get there. Ask yourself; if this company is great and money can be found in multiple places, why are they asking you, what value can you add to their startup?
Fundamentals and valuations need to exist concurrently
I’m well aware that I’m writing this as we are moving into a bear market, however I would have said the same a few years ago.
In order to succeed as an investor you need founders that are able to attract (storytelling) follow-on capital for good valuations while the underlying fundamentals of the company you are investing in are solid. If any of those two components are lacking it’s unlikely going to be a good investment for you.
Do your own research as most investors do not operate logically
Investors in your network can have a million reasons why they are investing in a company. It’s unlikely that any of those reasons have much to do with what you are looking for and what’s good for you.
Be thankful for good referrals and introductions to companies, but don’t just follow others (no matter how well respected they are) and do your own research.
The statistics on success are correct
I wrote about the 9%-rule a few years ago:
Among the successful companies, 9 percent provide investors with returns of 10 times their investments (‘home run’), which compensates for failed investments.
Our data continues to show that this is a correct assumption.
Founder, founder, founder
Don’t overestimate yourself as an investor. No matter how successful you have been in a previous life before you became a VC, you are a source of money for founders (and if they are good; money can be found anywhere).
Whether founders will succeed is entirely up to them, no matter how many board- and advisory seats you take on, you are not on the ground and won’t be able to fully grasp the specifics of the company.
So be careful not to waste anybody’s time with your (well meant) advice.
Say farewell to your investment thesis!
So, do throw your fund thesis out of the window and recognise that success all depends on the talent of the founding team. Be grateful if great founders let you invest in them and take you on their journey.