Why a VC is like a football team

In this post I quickly want to illustrate why I think that a modern Venture Capital fund is like a football team.

Our business sounds actually pretty straightforward. We invest money in promising companies that create an innovative business or technology and have a high potential to grow. Then we try to build up big companies and sell them for a high price (sounds easy right?). So far so good, but it turns out that it isn’t that easy and that is about the itsy bitsy details. Still a lot of people do not really get how this works. Therefore I am going to answer the following question:

(A16z or Andreessen Horowitz as it is really called wrote an interesting article about VC economics you definitely should read. And why they think Christoph Columbus was the first successful Venture capitalist. Some say the whalers in New England are the first real VCs. I do not know the answer but also this article in the Economist about the whalers and beginning of VC is great to read.)

Why modern VC is like football?

From Christoph Columbus to whaling to modern Venture Capital was a long way. And a lot has changed since then. The new whales are unicorns (private companies with a company valuation greater than 1bn USD) and the new products are software products (or healthcare and biotech). But for me modern VC is much more comparable to sports. Or to be more specific: it is like a football team (and yes I talk about soccer but we in Europe don’t call it that way). If you prefer American football you can use it as a metaphor as well. Because basically it does not really matter. Just think of any teamsport you like.

Rule #1: Great individuals can make a team better but cannot form a team

What is true for sports in this case is true for Venture Capital as well. You need different sort of players who are doing different tasks and having different backgrounds. This is also accurate for a Venture Capital fund: Just strikers with an Investment banking background does not work. But only ex-technical founders without any legal or financial background does not work either. The same is correct for any startup — having 11 stars on the pitch kills the team. Strikers win games but the championship will be yours if you also know how to defend.

Rule #2: Titles bring you fans (=LPs) and great players (=founders)

A good team relies a lot on good brand. And this correlates a lot with winning titles. That is why Real Madrid, Barcelona or Bayer Munich have a big fanbase (and therefore a lot of money). But this is not only relevant for the fans (LPs) but also for players (founders). Therefore great players go to clubs where they can win titles (and also most of the fans). In this case a title is a big Exit, IPO or building an unicorn together. And if your club has proven that it is able to win titles it will be much easier to attract great players. So this basically means that Venture Capital is a self-fulfilling prophecy. Also research proofs that past performance in case of a Venture Capital fund is an indicator for future performance. There are couple of publications out there around this topic. I would suggest this one (Only around 10% are performing well and bringing their investors some returns — so a lot of clubs that are not winning titles; like in football).

Rule #3: A good VC partner is like a good coach

So partners at Venture Capital firms more or less act as a coach. Because they are sitting on the bench (=advisory board or board of directors) and guide you where to go next (strategy) and also help you going in that specific direction with a huge network and experience. But in the end of the day it is your decision where you want to go because you are playing on the pitch (and it is your company). Great talents want to work with great coaches to get better. Also this is an indicator why some VCs attract proportionately a lot more great talent than others (and this is also the reason why Sir Michael Moritz from Sequoia and Sir Alex Ferguson form Manchester United wrote a book together — I think they like my theory).

A good coach knows how the game works inside out — that does not necessarily means that he knows how to play it. But it is a huge plus! He can calm down a situation and is the person to talk to when you are facing problems or other troubles — because he can or at least tries to help you (or knows someone who can help you). If you are the first person a great founder calls when he is in troubles is the best signal you can get — it means he trusts you and that you are probably a good coach! High Five!

Rule #4: Scouting is key

To get the best talent as early as possible and to not buy them too late for a high valuation (Series B plus) you have to be out there and get to know them. And see them when they are young. If you meet them regularly at events and pitch demos chances are much higher that they like you (given the fact that you like them) and want to work with you. It also helps a lot to know the coaches from smaller teams or other teams, because transfer season comes sooner than expected!

There are cities like Berlin, Stockholm, London, Copenhagen, etc. where a lot of talent is out there and a lot of companies are created. But this also means that there are a lot of other clubs recruiting. So you can be the king or club to go to in a specific sector or city. Choose wisely! It is really hard and takes a lot of time to build up a reputation.

So it is pretty easy right? Either you are a good player or a great coach — in both cases you have to know how football works ;)!