#38 Essential Skills in VC

Essential Skills in VC - Photo by Markus Winkler on Unsplash

Both private equity and venture capital are usually considered 2nd careers. Why? Because there’s no time to learn on the job. More importantly, you’re working with other people’s money and mistakes can be costly, both financially and reputation-wise. That being said, getting into VC is like passing your driving license. You’re legally allowed to drive but it will be some time before you are competent.

Being a successful investor requires mastery in these three areas:

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1. Deal sourcing;
2. Transacting deals; and
3. Portfolio management.

Let’s break them down in more detail.

1. Deal sourcing

This is the main currency in venture capital. I recently heard that there was only a 2% overlap of investors that participated in Series A rounds of the world’s most successful companies - Microsoft, Uber, Spotify, etc. That implies that most successful investors are not visionaries but were rather just able to attract successful entrepreneurs / start-ups. Think about it, as an entrepreneur, would you rather accept money from a VC that has created a few unicorns or from a VC with no track record, even if the deal terms were more favourable. This selection bias is the reason why top tier firms continue to hold poll positions and new entrants struggle to compete.

Here’s how to grow your deal flow:

• Develop your network with one-on-one meetings with other investors and deal introducers;
• Choose a niche sector and educate the market on what you’re looking for; and
• Build your personal brand by creating content. Whether it’s tweets, LinkedIn posts or podcasts, get yourself out there.

 
     2.  Transacting deals
To some extent, transacting deals is just about following a process. However, if you’ve ever bought a house, you’ll know that not all estate agents are created equal.

Transaction delays typically cause the destruction of value, place the investee companies at risk, and may even cost you the deal. If the company turns out to be Uber and you lost your chance to participate due to tardiness, you’ll probably be inconsolable.

Tips to being a proficient transactor:

• Ask entrepreneurs the right questions. Develop a top 20 list e.g. “what keeps you up at night?”;
• Develop a framework for evaluating deals – great investors have solid principles from which they do not deviate;
• Get really good at due diligence across all areas – financial, technical, management, legal and commercial;
• Develop your ‘lie detector.’ It’s unfortunately human nature to lie (watch Liar Liar with Jim Carrey if you don’t believe me). Find out what half-truth’s entrepreneurs are telling you. Your success as an investor is predicated on this skill;
• Master the art of effective communication;
• Drive deals forward e.g. Don’t let lawyers send ping-pong emails. Instead, arrange a meeting and get all cards on the table; and
• Make haste, when a transaction is ‘live,’ don’t rest until it’s complete.

 
      3.  Portfolio management
Many venture capital firms like recruiting former entrepreneurs because they’ve actually run a business before rather than merely learning about it in a textbook. Management consultants are a close second because they’ve worked on multiple companies.

Lots of investors talk about offering ‘more than money,’ yet very few are able to deliver on that claim. In reality, most investors will likely never be as good operators as the management teams they are backing, not to mention it’s not usually a wise idea to tell people how to run their business.

Investors spend their time thinking about strategy, developing investment theses and sitting in Board rooms. These areas are where considerable value can be created or destroyed. Add value to your portfolio by:

• Reacting quickly to any issues that arise;
• Sharing your research and investment thesis with the company;
• Helping shape the Board, ensuring that agendas are appropriate and that the maximum value is being extracted from all Board members; and
• Actively help with follow-on fundraising. Your network and skill-sets are hugely valuable.

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Remember that the learning curve in venture capital is never ending. It’s not a profession that you’ll likely ever master. Even investors who have been doing the job for 30 years learn new things every day.

So, stay curious and stay humble,

Alex @thetippytopblog
 
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