The venture capital industry is a very small industry. It looms large in the minds of the entrepreneur, has a huge impact on the economy and yet, it’s a very, very small group of people.
The venture capital industry is a very small industry. It looms large in the minds of the entrepreneur, has a huge impact on the economy, and yet it's a very, very small group of people—only a few hundred firms, and maybe a thousand or two thousand professionals who actually make investment decisions and sit on boards.The fact that the venture industry is so small has big implications for entrepreneurs. It's very competitive. You know, as an entrepreneur you've got to do something to really break out to get the attention of the venture capitalist.
Venture capitalists typically like to spend just a little bit of time on a lot of opportunities. The more things they see, the better investors they are; but when they find something they like, they like to spend a lot of time on very few things. You want to get to that point where they're willing to spend a lot of time on you, but you've got to break through the clutter to get there.
So when a venture capitalist makes an investment, they're looking for a massive market opportunity. They have to have a vision for making ten times their money, twenty times their money, even a hundred times their money. So in that first meeting, you've got to convince them that what you're doing is disruptive to a massive market, and that your team, you in particular, are really special, that you have some sort of comparative advantage in pursuing what you're doing, that if another team popped up in Silicon Valley and Boston, and even in Beijing, that it couldn't replicate what you have.
One way that I've found that entrepreneurs really stand out is where they have a story, a narrative that has led them to this company. Some entrepreneurs were meant to do that business all their life, and when they come in my office and talk to me about their journey it's compelling. When I meet an entrepreneur that seems more opportunistic, it's not as authentic.
Let's talk about the financial structure of the industry and how VCs actually make money. They're given capital by limited partners or LPs and they have a goal of trying to return as much of that capital as possible after a ten year period. A good VC fund might return two times that capital, three times that capital. A great fund even more than that. So if you've got a fund that is a, say, a $100 million fund, they're trying to return $300 million to their investors over that ten years. That means they need to find investment opportunities that can be 10x, 20x, or 50x because most of those investments will be zero.
Look, startups are hard. More startups fail than succeed. And so as an investor, when I look to invest in an entrepreneur, I want to know I'm investing in someone who has the passion to see it through despite all the ups and downs. So here's something you probably don't know about venture capitalists. They're not doing it for the money. I know that sounds crazy because the venture capital industry can be a very lucrative industry. But most venture capitalists really just care about disrupting an industry; they fall in love with the technology; they fall in love with the entrepreneur; and they love the passion that they have for doing something really big and making an impact.
Bussgang, Jeffrey. 2010. Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Own Terms. New York: Penguin Group. Chapter 2 “Inside the VC Club: The One Thousand Deciders”.
Connor Forrest. “The Dark Side of Venture Capital: Five Things Startups Need to Know.” TechRepublic. Article, March 10, 2014.
Wil Schroter. “4 Things Every Entrepreneurs Should Know About Venture Capital.” Forbes.com. Blog Post. June 11, 2014.
Questions for You
What about my company or myself will stand out in the eyes of investors?
What about my team is special to investors?
How big is my potential market size?
Have I perfected my story? Which parts need fine-tuning?
Questions for Your Team
What about our team will stand out to an investor?