The first year in Venture Capital — Lessons (to be) learned.
After graduating from law school I decided to drop a budding law career to become part of Berlin’s buzzing technology ecosystem. I worked in BusDev for 3 years with various companies such as Google, DailyDeal and pepperbill before joining the Angel Fund of Heilemann Ventures in May 2015, which merged with Earlybird Venture Capital in March 2016. The first three years of operational expertise were a pretty steep learning curve — but in VC this was exponential.
Here are the key learnings from my first year in Venture Capital, and what a year it was:
#1 Don’t trust the hype and avoid group thinking.
Adrenaline can run high in VC: there are those moments of finding the most sought-after deal in town and then pressure of making a decision with a tight turnaround. Often, the founders are thrilled because they’ve just managed to convince high profile investors to fund their company in a lead role. But what happens next? Well, a bunch of potential co-investors will want to join the syndicate and trust their colleague’s due diligence and evaluation processes, often resulting in an “oh, shit” boardmeeting. The so-called “fear of missing out” triggers irrational and at times hasty commitments, that are often regretted. Do not let yourself be ruled by the dynamics of a round, or as our partner Hendrik Brandis puts it:
“No VC has ever failed because of NOT having invested into a company.”
That’s the wisdom of 18 years VC experience speaking — and I can see the value.
There’s another psychological phenomenon stopping you from taking rational investment decisions — it’s called group thinking, and while strength often comes in numbers, in VC, you’d best be aware of it and avoid it. How? Discuss the crucial topics objectively without voting directly. Let the Investment Committee sleep on it and call in everybody involved the next day for a yes or no, but do so separately.
#2 Be patient — You will fall in love with the wrong companies!
I don’t know anybody in VC who hasn’t faced this problem. You’re evaluating your first investment opportunities and fall in heed over heels in the space of a few days — and the deeper you dig, the worse it gets. You’re rearing to present it in the first investment committee meeting (ICM) in front of the whole team and the partners. Go in with the expectation of potentially off-putting initial feedback: ‘I got a bad reference from the CEO,’ or, ‘The unit economics cannot be right — did you check the CPCs with Google keyword planner?’ or, ‘The market is shrinking, there is a BCG report on it,’ or, ‘There will be a new law in 3 months that will kill this model.’ Don’t panic: it’s all part of the learning process. After 1000 pitches you will be a pro.
#3 VC quality insurance — Benchmark, then benchmark more!
Basically, when I intend to invest in a specific business model within a certain industry segment I benchmark at least two times.
- Benchmark No. 1: Think of it like dating. You are interested in a certain industry segment, so you talk to every single founder and customers and suppliers within this segment before approaching the most desirable contender in town to with an offer to join your Investment Committee and get to know your partner’s parents. You make clear that you are seeing other people from the beginning — before deciding on “the one.”
- Benchmark No. 2: Now it’s getting unfair. Even though you picked the hottest date in town, settling down might not be on the cards — you or another investment team member decided to also invite another handsome singleton to dinner. What the?! Suddenly, you need to decide between the 2 (or 3, or 4) even though a comparison is very difficult, personalities and preferences can vary. However, VCs need to find the best opportunity within a specific time frame (e.g. 3 months) and in order to pick the best of the best they benchmark different companies, in different markets and stages. It’s a bit like comparing apples to oranges, but the path to true love never did run smooth.
#4 Do not ignore companies with crappy pitch decks.
During the last 12 months I’ve looked at about 800 pitch decks (excluding pitches that were out of focus). Most were very well structured and contained all the relevant information needed for the first steps of evaluation. But, there was also a great deal of horrible decks, the kind that lost me in the first three minutes of scanning them, leaving me with little understanding of what the business was actually about. As the notorious Snowman puts it, “If I don’t understand it, I don’t like it!”
Be careful! Keep in mind that the company might have been founded and led by techies exclusively, without a smart businessperson at hand as yet. The bigger a problem or project is, the more complex its solution might be, sometimes resulting in confusing pitch decks. Go for the big problems, there are no easy problems to be solved anymore. Dig deeper in case the problem is big enough. Crappy decks keep VCs away, but you probably won’t face much VC competition on the deal (seldom an issue in European early-stage VC, though).
A pitch deck is nothing but a first impression, a piece of paper. Remember, you are looking for great companies, not pitch decks.
#5 The deal isn’t done until it’s done.
Usually, VCs are in the position of turning down investment opportunities — with hundreds of founders trying to gain funding and support, they rarely experience a “no” themselves. However, the dynamic of a fundraising round can be unpredictable. Even after supporting founder teams for several months and negotiating terms at the same time, a VC can never be sure of securing a hot deal before the ink is dry. Very important lesson learned.
#6 Find your focus industries if you want to add value
Venture Capital is for generalists. You need an outstandingly curious mind and you better love learning to quickly understand business models, technologies and industries you’ve never dealt with before. However, it’s important to develop a certain expertise in the sectors you want to invest in. Only with the relevant network and market knowledge you are able to add crucial value — a skill every VC claims to offer but most in fact don’t. As a founder, you should challenge the VC (do your due diligence as well!) on your competitors and find out whether they are well enough connected within your industry. Be very clear about your expectations and support required from the beginning of the conversations.
#7 With money comes responsibility.
As a VC, you are in the position of deciding in which direction technology develops. You decide which markets will be disrupted next. You decide who will be laid off due to digitization and which new jobs will be created by technology at the same time. You decide which products will get the chance to shape society e.g. Uber (mobility), Facebook (communication), Google (information), Amazon (retail). This concept is put into question by the crowd funding movement, though in most cases so far it has been without economic success. Perhaps the DAO project will change that one day after having survived the hack of June 2o16. In the meantime, VCs should be mindful of the enormous impact they could have on the future of humanity.
And by the way: VCs mostly invest other people’s money (Limited Partners), which might be pension funds, insurances, banks, HNWIs, family offices and so on. With this in mind, responsible VCs act resourcefully while spending.
#8 Evaluating and investing into companies is easy — the real work starts afterwards.
As a VC you are not everybody’s darling. Some think you have an easy job: you pick the best companies and investing other people’s money without any personal risk or even ongoing effort. But that’s not even half of the story. You are responsible for the capital allocation — if your fund does not perform you may not have the chance to raise the second fund. Game over. So, VCs are also under pressure, and given the stakes, must be 100% committed to the companies they invest significant amounts of money in. A good VC will work his ass off to make his portfolios become a success story.
#9 Develop an entrepreneurial mindset. Be empathetic. VC is a product for entrepreneurs.
It’s a privilege to work with driven, smart, optimistic, often idealistic (I could go on) risk takers: also known as entrepreneurs. In the European tech ecosystem most people working in VC fit the former banking or consulting stereotype (Thx Vincent Jacobs for your research!). Analysts sometimes join a VC directly after graduating from university. Their everyday job is to say “no” to entrepreneurs with often 10+ years working (and life) experience on them — something that still appears pretty weird to me. Be fair and sensitive when communicating with founders. Don’t be late in meetings, be responsive, just treat them with appropriate respect.
VCs also have to act like entrepreneurs. Think about it: how can you be a good, strategic advisor, push funding rounds, recruit key hires, or make decisions under immense pressure without an entrepreneurial spirit? VCs also need to improve constantly if they intend to be the best product for entrepreneurs out there. Just like founders, they need cutting edge tech tools, data bases, creativity, and sales skills in order to do so.
#10 Pursuing a career in VC means life long learning… at the speed of light
After having learned the VC essentials (evaluation process, termsheet essentials, cap table, negotiations, dealmaking, board meetings, advisor roles), I realized that my first six months were just the very beginning of the VC journey. It’s a common believe that becoming an outstanding VC costs about 50m EUR. Understanding 3+ business models each day in different markets, dealing with different technologies, reading reports to science fiction novels, talking to industry experts, attending weekly events, and supporting your portfolio companies keeps the mind busy, sometimes too busy. There’s always more you can learn and understand, technology is a moving target — get used to it and enjoy the thrill!
What have been your first experiences in VC? Feel free to refer the post to other VC newbies in case you liked it. Good luck and feel free to reach out to me any time.