4 mistakes to avoid if you want to succeed in VC: a guide for first-time investors
By Pavel Cherkashin
Most venture investments fail. That’s just the nature of the business. Even the most experienced venture investors can’t foresee everything, and they sometimes misjudge people and misunderstand ideas or market conditions. But there are certain mistakes that are common among inexperienced investors — and ways to avoid them. Here are the top 4 mistakes I made, and the lessons I learned the hard way.
Mistake #1: Investing in smoldering businesses
The investor’s nightmare is not a startup that burns money quickly and goes out of business, but one that smolders for years, eating up management resources and producing little return on investment. It’s almost impossible for the investor to sell their stake in such a startup, which keep those funds frozen, unavailable for better investments.
Back when I just started angel investing, I would quickly fall in love with promising concepts and close my eyes to the entrepreneurial flaws of the founders. I’d think, “This idea is so great that anybody would be able to make it a success!” But I was wrong.
In one case, the founders built an amazing service but did not know how to build a large, scalable business. They were washed off the market by a more aggressive competitor with a weaker product. In another case, the founders’ ambitions didn’t go much further than just getting well-paid, stable corporate jobs. Their zero risk tolerance stopped them from leveraging the startup’s unique position on the market and good profits to raise more funds and expand globally. The business has rolled into inertia ever after.
I wish I could say this happened just once or twice, but it took longer than that before I learned my lesson: Never invest in founders with little ambition, even if an idea or a product sounds very promising. After all, venture success is not about the current state of a business, but about the speed at which the company accelerates its growth.
Mistake #2: Giving into FOMO (fear of missing out)
The fear of missing out is the worst enemy of a venture investor. There are new trends every year: the cloud, VR, AI, self-driving cars, cryptocurrencies, and so on. It’s tempting to just follow the crowd and invest in areas you know nothing about, lest you be the only one missing out.
As an amateur investor, I became an easy target for second- and third-tier companies in hot new spaces; they’d sell me on the promise of the market, rather than the quality of their product. Not knowing what future leaders were doing in the space, I was led to believe that the meadow was empty. But by the time the companies I supported delivered their products, the leaders would have already secured the greenest spots and push everybody else out into the swamps. Many of those investments died because I didn’t look far enough to see the strong competition ahead of us, already preparing to launch.
Those experiences taught me not to invest in businesses that I don’t understand, no matter how tempting they are. Now, whenever somebody pitches me a smart idea, I assume that somebody else has already discovered and funded it. Before making a decision, I search for private insights: I ask other investors, look for startups that have already raised substantial funding to solve similar tasks but haven’t announced their products yet and so on.
Mistake #3: Not visiting the startup cemetery
Startups come with a hypothesis to verify. The most reckless and absurd hypothesis might turn into billion-dollar businesses, while what seems like a great idea might soon become unsustainable.
Ideas that are obvious but not viable exist in every industry. I’ve lost count of how many times I’ve heard a pitch about compensating end users for viewing advertising. “Nobody is smart enough to do this yet,” entrepreneurs tell me again and again. But many have tried it, and the idea just doesn’t work.
It took me a couple of years and a few hundred thousand dollars to learn how to identify such ideas. The key is to verify new ideas by looking for them not just among successful startups, but also among those buried in the “startup cemetery.” I also ask other investors whether they’ve had to deal with the idea and what they think about it, because investors are more willing to share their failures privately.
Mistake #4: Focusing on operational work
All too often, new investors decide to roll up their sleeves and show how the business should be run. It was a natural trap for me to fall into; after all, I’d built three successful businesses prior to becoming an investor. So, from time to time, I would jump into the operational routine of a startup and let myself to be distracted from my real job of looking for the next venture. Almost always, it resulted in a miserable failure.
I realized that if I can’t afford to dedicate my life to new ventures, there will always be somebody who can. So I learned to delegate the operational work to others and focus on turning the next venture into a success.
I hope that reading about my early mistakes helps you avoid making them yourself.
Pavel Cherkashin is a venture capital executive and entrepreneur with a successful track record of building billion-dollar companies as a founder, investor and board member. As a co-founder and managing partner at Mindrock Capital and GVA Capital, Pavel invests in artificial intelligence, blockchain and self-driving tech.