I just finished a 5-month internship at daphni, a Paris-based VC fund investing in European early stage startups. Still being a young fund in the midst of building their European network, daphni was looking for someone who could put them on the map of the German tech ecosystem.
I had the chance to work on these tasks, while discovering and connecting the French and the German startup ecosystems — something I found compelling not only from a business perspective, but also in a political context at times where a common European dream seems far.
I felt it would be a shame not to take the time to look back at my time there and to draw up a review of what I learned about the VC industry.
Lesson 1: Designing a good sourcing strategy is key
Whatever relationship you can build or value you can bring to the table, the key is to have access to good investment opportunities. Thus, VC talks a lot about deal flow and the ways to generate it.
You can actively source investment opportunities through research, startup events, or networking with other VCs. Many VCs also engage in deal sharing calls with other investors to mutually increase the reach of their networks.
VCs also receive tons of investment opportunities passively through their inbox. The number of good opportunities received that way depends largely on the brand, reputation, track record, etc.
To make a career in VC, it is essential to define a good sourcing strategy and build a quality network.
There is a mutually beneficial relationship between the organisation and its members. The company benefits from the connections built by its team members over time, and, vice versa (the same is true for the brand by the way). Being new to the buy-side, the company network is usually far more impactful. Yet for me it was another story: My network was zero and daphni’s German network was still rudimentary.
It was my job to build an ecosystem for daphni in Germany and I was responsible for expanding the deal flow from the DACH countries (Germany, Austria & Switzerland). Put differently, there was very limited inbound deal flow from these regions and we had to define a strategy on how to become more active and source startups in Germany, with the goal of getting passive deal flow once daphni had a sufficient network and brand in DACH.
Looking back to the inception of our sourcing strategy, the idea was to 1) reach out to German investors, 2) attend startup events, and 3) reactivate and formalize existing connections.
As it was clear that all of these approaches would only pay off in the long term, it was equally important to balance the timeframe for potential payoffs. So, I started reaching out to founders of startups I found promising after having heard or read about them. This rather unstructured sourcing of startups turned out to be less efficient than aforementioned ways, but it quickly gave me incredibly valuable experiences that I will describe later.
Coming back to the sourcing strategy, there have, of course, been some iterations.
Events are a huge investment of time and money, so you want to ensure a good ROI by choosing events that show a good mixture of well-organized matchmaking, quality startups and insightful satellite events. While opinions differ on how much value startup events have, I generally believe in the power of events to bring together the startup ecosystem. I would encourage everyone to go to as many as possible and continue attending those you liked when the event calendar repeats the next year.
In terms of investor connections, the network filters over time from dozens of acquaintances to a short list of those contacts that have an investment approach similar to yours, and with whom you are searching for ways of collaboration. An efficient way to stay in touch is planning update calls (ideally bi-monthly), during which you can discuss startups you are currently looking at, or to invite your counterpart to participate in a round you decided to invest in.
Leveraging this network, I could soon self-responsively source and share interesting investment opportunities and eventually gain ownership of my deals — much sooner than you might expect when comparing your job level to its equivalents in investment banking or consulting.
TIP 1: Discover your hunting instinct
In venture investments, feedback loops are infamously long and I think the same is true for sourcing deals. You see the output of your sourcing activities weeks if not months later (and you see the performance of the investment years later). Without direct measurable results, you need to have an unerring instinct that makes you move in the right way and hunt the promising startups. Maybe you are not sure where to find good deals, nor how to get them, but you have to have the right instinct to get there. And having a lot of freedom in sourcing deals on the one hand, and ownership of deals to pursue further on the other, gives you a high intrinsic motivation. Together with a pronounced hunting instinct, this actually turns work into fun. Believing that enjoying work positively correlates with output, instinct and motivation will also help you in becoming a successful VC.
TIP 2: The power of extroversion
What surprised me during my first months in VC was how extremely extroverted and social you have to be. With regards to your exposure to the business community, the role as a young VC is actually quite similar to a position in sales. You are selling the whole time; be it to entrepreneurs or to investors you want to partner with. Thus, some of the typical salespersons traits are also particularly helpful for analysts. Extroversion is especially key for building a network and reputation, which will be rewarded with quality inbound deals.
Lesson 2: Learn to ask the right questions
As an analyst, you will see dozens of startups per month and there certainly exists a trade-off between being efficient at screening and being open-minded to new creative ideas, thus not missing the “crazy bets”. It requires a very entrepreneurial mindset: Looking for strengths instead of weaknesses at first. You thereby avoid institutionalizing the process too much, while maintaining a clear framework for due diligence.
By choosing a balanced position in this trade-off, you have to develop good habits. I would always start with 20 minute calls; a quick conversation to find out if you want to go deeper. During the call you want to find out about the “raison d’être” of the startup, hear its founding story, usually starting with a) the problem they saw in the market, b) the solution they developed and c) the vision they have for the future.
If the business idea sounds exciting, it’s time for a more detailed follow-up meeting/call (about one hour) to find out more about 1) the product, its value proposition, the disruptive potential of its business model, technology or process innovation, its scalability and its defensibility 2) the market, its structure, size and growth 3) the team, its experience, drive and capability to execute the go-to-market strategy. Research suggests that the founding team is by far the most determinant factor for success in early stage companies. So I always tried to be a good listener and made sure I perfectly understood what makes the founders special.
A big trap would be to rely too much on a rigid framework or a checklist when assessing an opportunity. Every venture requires a unique approach and it is essential to learn how to find the relevant question for a given situation. As a young professional, the most important is maybe just to go from 0 to 1: To dare asking questions and to dare recognizing what you don’t know or don’t understand. You really need to fully understand the business, its specificities and its challenges. While it is your responsibility to ask the right questions, it is the founder’s role to explain the business as comprehensively as needed to obtain the full picture.
TIP 3: Build a trust relationship with founders
Part of the exploration process involves asking challenging questions. As a junior investor, often younger and less experienced than founders, it is something that can be particularly hard, especially because you want to maintain a good relationship (not to mistake with friendship) with founders at the same time. HavingIn order to have the tough business talk, while still developing a good relationship that can help you win a competitive deal in the end, requires trust between you and the entrepreneurs. And this trust relationship requires self-reflection, a social skill one can definitely enhance in venture capital.
TIP 4: Develop proficiency in technology
In VC, I could quickly observe how quantitative topics outweigh qualitative considerations, including human resources (the founders), strategy and, for a growing number of startups, technology. After more than a decade of predominating business model innovation, deeper tech is sexy, again. To be able to analyze startups in agtech, foodtech, healthtech, mobility and others, you need to have solid understanding of these trends and the underlying science. If you have a business background, you need to develop a strong technical mindset and a passion for tech. Surely, this cannot cheat one’s lack of academic knowledge in engineering, but, following a sector agnostic investment approach, perhaps the key is to maintain a well-balanced view in the interplay of engineering (possibilities), economics (feasibilities) and humanities (adoption and regulations).
Lesson 3: Go beyond executing the investment thesis
What you have to learn as a young VC, is that you evaluate an investment opportunity not only in itself but also relative to the fund’s investment thesis. You are not investing your own money. The fund is an investment vehicle of limited partners’ money that agreed on specific investment criteria defined during the fundraising in the fund’s Private Placement Memorandum. I soon became acquainted with the investment strategy to determine the investability of a startup, with factors including not only exit potential, sales cycles, and capital intensity/dilution risk, but also matching a specific thesis (for daphni: usage-driven, early stage tech companies with a European DNA and an international ambition, reaching a minimum stake).
It was key for me to fully understand what we are investing in instead of only executing a checklist of criteria. It means to see an investment decision from a fund management’s perspective; to select deals that fit to the fund’s preferred investment amount, equity stake and timing. Learning about the strategy behind the investment thesis was really exciting for me and a valuable insight I took out of discussions with our partners.
Funds often publish what they are looking for in their investment thesis. So, a good way to get an idea of investment strategies is to read and compare investment theses of investors across the world. I also set up crunchbase alerts for investments done by Tier 1 investors in the US (e.g. Benchmark, Andreessen Horowitz, Sequoia, Union Square Ventures, etc.). I followed what industries and business models they are investing in, what their policy for investing in follow-on rounds is, and with what type of co-investors they like to participate in a round. Asking myself what might have been the investment rationale of these top-tier funds helped me a lot in getting an idea which kind of deals I should be looking for.
TIP 5: Spot the value of contrarian views
To achieve exceptional returns, you have to be right and contrarian. This explanation of venture capital probably had the most impact on my thinking and is embraced by many early stage investors, establishing a culture that values differing opinions. At daphni, analysts do not only actively participate in investment committees, but also take part in the decision making process afterwards. This allowed me to bring in my own views instead of following the opinion of a partner with her/his astonishing track record (something a junior might be inclined to do). Indeed, a partner’s opinion will turn out to be more elaborate in most cases, but I felt that holding my own opinion was very much appreciated as fund managers know of the value of diverse opinions. My recommendation is to never underestimate the value of contrarian views. In daily VC work, it means to make sure that a popular trend a startup is following isn’t actually a bubble, as well as to ask whether the crazy vision of a founder is not actually an idea with the potential to revolutionizing an industry.
To sum up my experiences:
- Networking is key to source many deal opportunities;
- asking the right questions as well as a good business judgement allows you to identify the most promising deals;
- and the investment strategy determines which opportunities you invest in and how well the fund will perform.