If there is one segment of the startup ecosystem that’s misunderstood by most, it’s the venture capitalists. Unfunded founders perceive them to be greater than mortals, stories about whom they've heard or seen them speak at an industry event. Founders whom they didn't fund perceive them to be sharks and often people who “just won’t get it” and funded founders either view them as partners in their growth or a necessary evil one must deal with. Most opinions people have about VC’s are strong, and often wrong. While a lot of the VC’s are able to empathize with a founder’s side of the equation, most founders aren't able to empathize with the VC’s side of the equation. As a founder myself and also as someone who has worked with investment funds in helping them source deals (PE and VC alike) – I have had a good view of both sides of the equation.
Here is how I view it. Who is a VC, what does he want and how does he spend his time. Ok, here is buy side 101:
Here is how I view it. Who is a VC, what does he want and how does he spend his time. Ok, here is buy side 101:
1. A VC is a person at an investment firm, typically focused on technology investments
2. He invests not his own money, but that of people who invested in his fund to invest it further (LP’s or Limited Partners, in tradespeak) – note, getting this money from LP’s is incredibly difficult and takes a lot of time.
3. His agenda is to make an investment and generate an exit within 7 years, as typically, that is his fund’s “cycle” – after which, he needs to provide “returns” to the “LP’s” who invested in his fund
That, essentially is what the VC is in it for – for the exit and the returns. Now, here are a few misconceptions people have about VC’s.
Founder Misconception #1 – it’s easy being a VC.
Founder Misconception #1 – it’s easy being a VC.
Truth - Let’s look at how a VC spends his time:
1. Constantly identify startups he’d like to meet (origination)
2. Meet, on an average, ~500 startups a year – that’s more than a startup a day. So basically, on a daily basis, a VC patiently sits across a table, facing a founding team, who are 100% convinced that what they’re doing is what needs to be done to make the world a better place, and that they’re the right people to do it – and that they will change how their industry works, if only sir, you’d back us with a $2M seed. This is the revolution sir, don’t you see!!! Yes, the VC does see. He sees a revolution being pitched to him daily. Different faces, same story.
3. Unlike what most people believe, VC’s are actually very polite and professional. They will hear you out. They will even give it a serious thought. If they like it enough, one of their highly qualified analysts (founders might hate them, but take it, the analysts are good) – will take a serious look at your company and metrics. If it makes sense, they will continue the conversation. If it doesn’t make sense to them (and there often are very good reasons for it not making sense to them) – they will communicate those reasons, to the team. They might even give you milestones to meet, which if you do, they will give your company another very serious look. VC’s run this process with hundreds of startups a year. Even if you’re good, maybe their fund doesn’t do the sector you’re in. There are multiple reasons for him not to do a deal, and often, they will try communicating those reasons.
4. Next, if he does decide to take it further with some startups, he needs to spend time setting up the deal and agreements etc
5. Next, startups he’s already invested in and is a part of the Board – he needs to actively work with in building the company – including but not restricted to – helping his portfolio make key hires, raise more capital, pivot, strategize, manage accounts on and so on –the good VC’s add a lot of value, and that value comes from the time they spend with their startups
6. Still not done. He also actively needs to be working towards exiting companies he’s a part of – as that is the end game
Do appreciate, that points 1-6, the VC needs to do almost simultaneously. He is always working on these 6 things. Most founders don’t appreciate how hard a VC works. Like founders, VC’s are under tonnes of pressure, work very hard and things often take a direction they wouldn’t like or did not anticipate. They, like founders, are constantly fire fighting.
Founder Misconception #2 – The VC’s don’t “get it”
Truth – Yes, they do. Have a look at the Indian ecosystem. YourStory ran some numbers on the deals that were funded in 2007 and where they are today – you will see, a high percentage of the companies they funded are still alive and doing well or have exited well. So they do “get it”.
Also, founders think, “they don’t get what we do”. Here is what founders should appreciate – founders think about their company, their space, their sector and their team, all day long, everyday, for months and years. The VC, on the other hand, has a much better macro perspective. He sees hundreds of deals, of all colours, shapes and sizes – from consumer to enterprise, SaaS to cleantech, Ecommerce to Taxi – this gives them a very good macro perspective. Also, VC’s meet hundreds of teams. This gives them an eye for the good teams. They are instantly able to sense it. They know more about a team, the company and the sector, after the first meeting, than founders would like to believe. And when their analyst does his diligence on your company, you’d be surprised at just how much they know. They are often able to see things founders aren’t – as they don’t have tunneled vision.
Founder Misconception #3 – VC = Equity Junkie
Truth – Not really. They want you to be motivated and therefore have a fair stake. But they also need to create a fair deal with enough room for them and other capital partners on the cap table – which is what makes the company fundable for future investors
I could go on. But I will conclude by saying the following:
1. The VC, like you, is human and will sometimes make mistakes. But he works equally hard, has equally noble intentions and wants you to do well, as that is when he does well
2. When they reject a deal, it’s often for very good reasons – have an open conversation with them and delve into those reasons – it will help you become a better founder and your company a better venture
3. If they do invest in you, they are your partners in growth. View, and treat them as such. You’re on the same team. You sink or swim together. That’s why they’re called “capital partners”
4. He’s being pitched all the time. In the elevator, in a catch up call with an old friend, over email, face to face , at bars, conferences and who knows where else – appreciate his interest, even casual, in what you do
5. A VC rejecting your company does not mean you’re in a bad business or that you’re not good. VC’s look at a number of things – size of your market (you can say anything you like on your investor deck, but they usually have an analyst better than yours looking at it), sector, how big the company can be (they typically want companies that can be $500M companies at peak scale) and many other factors. You may very well be in a business that can do $5M in revenues every year with good profits – but those are not the deals VC’s look for.
Experienced founders know all of this all too well. But first time founders should understand who the VC is, what his problems are and what his objectives are.
Ash Narain
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