Year 1 in Venture Capital — a 20 year old’s Reflections
While I’m definitely no expert, having just finished my first year in venture capital, I do feel that I have learnt a thing or two. This article is targeted towards those aspiring to learn about/break into Venture Capital. Here are my top takeaways after year one:
The 80/20 Rule (AKA the Pareto Principle)
When you start working in Venture Capital, there is no doubt you will soon hear about the “80/20 rule”, or the Pareto Principle. This concept describes the phenomenon of unequal distributions that follow a “power law”, and is a powerful concept to understand as it describes so many phenomena surrounding us. Peter Thiel describes it best in Zero to One; “In 1906, economist Vilfredo Pareto discovered what became the 80–20 rule when he noticed that 20% of the people owned 80% of the land in Italy — a phenomenon that he found just as natural as the fact that 20% of the peapods in his garden produced 80% of the peas. This extraordinarily stark pattern, in which a small few radically outstrip all rivals, surrounds us everywhere in the natural and social world”. 20% of patients account for 80% of healthcare spending. In Venture Capital, one or two investments will generate the bulk of your returns. Most importantly as a takeaway, 20% of your actions will drive 80% of your outcomes. Focus on the 20%.
The Art of Deal Sourcing
In VC, strong deal flow is everything. In order to find that outlier that will return 10x, you need to make sure you’re sifting through a high volume of good quality opportunities. A simple way to think about generating deal flow is in terms of inbound and outbound.
Outbound: In general, unless you’ve already built a brand, when you’re just getting started you’re going to be focused on outbound. This means hustling at demo days, attending community events, and cold reaching out to Founders on LinkedIn (I find filters to be especially useful for making this process more efficient). At QUT bluebox, we strategically employed an outbound approach so as to not damage relationships with alumni (a benefit of outbound is you can effectively say “no” without saying no — that is by just not making contact).
Inbound: Generating inbound deal flow can be a powerful tool, but also comes with drawbacks. High quality referrals from reliable people in the network is gold (can’t stress this enough!), and generating profile or domain expertise can give you exclusive access to deals as a strategic investor. However, as your brand becomes bigger, inevitably you will start attracting a tonne of low quality opportunities. Think about being a Shark Tank judge — you wouldn’t even be able to walk down the street without getting pitched half-baked ideas! Not all deal flow is good deal flow.
People, Tech & Market
If you don’t know where to begin in analysing an investment opportunity, a filter I have found to be useful is to think about it in terms of People, Tech & Market. Let’s not kid ourselves — at the early stage people are the most important. So what does this look like from an investor’s perspective? Well, is the founder a resource magnet? Do they have deep market insight? Have they experienced the problem personally, and have the sustained passion to carry the venture through to exit? Does the founding team have a complementary skillset? Note: of course we can all think of some pretty compelling examples of solo founders, but teams with more than one founder are statistically more likely to succeed. Is the tech hard to replicate? What are the dynamics of the market? You get the idea.
Advice to Students Looking to Break In
I’m not going to lie, it will be hard. Particularly in a small market like Australia. But it’s not impossible. If you’ve been following along, you should have an appreciation for the importance of having a network. Building a network is the only way, so get creative! Is there a student entrepreneur society on campus? If there isn’t, found one! Does your university have a venture fund you can intern at? Demonstrate a passion for the space, and meet as many people as you can. There’s an old saying, “if you want money, ask for advice”. I believe this to also be true for trying to get work experience. Humbly approach VCs to see if you can pick their brains — they will most likely be flattered, and may be up for a coffee chat. If an opportunity arises in their firm, who do you then think they will think of? :)
Lastly, recognise the power of something I call The Snowball Effect of Opportunity. This is a powerful force that everyone should seek to wield. Whilst luck is always involved (certainly it was in my case), you can also create your own luck, and put yourself in the best position to get lucky. Just like the majority of capital accumulates to the top 1%, opportunity similarly breeds more opportunity, gaining momentum like a snowball rolling down a hill. I think I can best demonstrate this through describing my own path to VC (at the risk of sounding self-important, but here goes). In high school I busted my tail to earn a scholarship to university. By having this evidence of achievement, I was able to convince QUT’s International Case Competition Squad I had potential, and was accepted (note: I was rejected on my first attempt — persistence is key). After competing at a few international competitions, when it was time to apply for a short-term scholarship for an internship in Tokyo, I was able to make a compelling case (again, I was rejected the first time I applied with no case competition involvement, demonstrating how opportunity accumulates). In Tokyo I met someone who recommended me to my boss for an internship opportunity. Was this something I planned for? No. Did I make the most of every opportunity I had? Yes. Your path will be unique, but at the end of the day, seeking out and making the most of every opportunity is all you can do.
If you want to put any of these tactics into use, feel free to reach out to me for a coffee: https://www.linkedin.com/in/marcus-poniewierski/. If enough people find this useful, I may make this an annual thing. What’s next for me? After an amazing 12 months at bluebox, I will be moving down to Sydney with BCG Digital Ventures. If you’re in Sydney, let’s meet up and get to know each other.
Cheers.
Marcus Poniewierski
