“I’m not just a VC I’m a founder too…”
Lessons from the first decade of an emerging (emerged?) manager
I started the working year of 2024 with a LinkedIn update. I am not a prolific LinkedIn user but Monday 8th January 2024 marked the completion of my first decade since setting out to launch our Venture Capital business, Illuminate Financial Management. The post has been incredibly well received and so I thought I would expand on some of the experiences and lessons that I’ve learnt from the first decade of launching and running a Venture Capital business.
One of the things I often tell our portfolio founders is that I’m not just a VC, I am a founder too. I didn’t join an established venture firm. I, along with the team that joined me along the way, built one and I’ve built two other businesses before this one, a fintech and a car dealership (yes you read that correctly but that’s another story). The reason I make the founder distinction is because I like to say that in our journey together we will follow a road I have been on as a founder, avoid some potholes, and fall into some new ones. But hopefully we can help each other out of the new ones, learn and continue along the road. So I thought it might be time to write down some of the lessons I’ve learnt on path of the founder of a VC so that might help a few others avoid some scraped knees along the way.
For those of you who don’t know me a quick history lesson (feel free to skip this bit). I had been in Financial Services for 23 years when I started to launch Illuminate. I joined Deutsche Bank as a graduate and stayed there for 13 incredible years, becoming a fixed income derivatives trader, running global business lines, and ultimately spending my last 4+ years as COO for the Fixed Income and Credit Derivatives businesses sequentially. As a COO at DB I sat on the boards of many industry consortia, my first exposure to what we call enterprise fintech today. I learnt the good the bad and ugly from that perspective. I left DB in 2005 joining the exco of Creditex at the same time that TA Associates invested and launching their post trade processing business which culminated with the sale of Creditex Group to ICE Group in 2009. I always say that was my road to Damascus moment: we became the market standard but along the way I had a horrible realisation “Was it this difficult to sell me a solution I was actually desperate for when I was the MD at the Financial Institution?”…the answer was Yes. The thing that made us successful had nothing to do with over the horizon technology and everything to do with having an industry network to take the (potential) solution to with warmth and credibility. That made all the difference to achieving the adoption of technology which makes a solution versus just having technology which achieves nothing. Following that sale I joined ICAP at the end of 2009 where I was also on the Exco and ran the Post Trade and Information division. Along the way I hired a guy and we set up ICAP’s CVC. Fast forward to January 2014 when I left ICAP and set out to launch Illuminate.
So, what have I learnt in ten years of building our venture firm? Some of these are lessons I learnt in other businesses but are of course equally applicable to building a venture capital firm. So here are some of them in no particular order:
1) Long term relationships matter (and people invest in people)
Building any kind of career is a long game and building a company is no different. When I look back to the pivotal moments of support that provided the foundation for Illuminate to get started it mostly came from people that I had long standing relationships with, who knew what my domain expertise was, what my values were and were prepared to take risk either reputationally with personal capital or financially with actual capital. Mostly these were people I had maintained a relationship with outside of a transactional need for years which brings us to the next point.
2) Don’t be transactional (Karma is a core value)
Illuminate’s success is built on long term relationships and those relationships are maintained (And often started) when we had or have nothing to “sell” at that moment. We adopted Karma as a core value at Illuminate a long time ago. We try to help people along the way and believe that it will open new opportunities and networks down the line. To misquote the classic wisdom around marketing spend, ‘Half of my time meeting people is wasted; I just don’t know which half’.
3) If you hear yourself say something multiple times, ask yourself what you are going to do about it?
The Illuminate genesis comes from hearing myself say over and over again “We’ve hit a moment of generational change in capital markets infrastructure, based on the macro operating environment and technology is the answer but not the cause”. That led me to believe my career was best spent identifying solutions to those macro problems. I still believe that to be the case but with the next point adding to it.
4) If you hear yourself change your story, ask yourself “why?”
Often when we tell the same stories over again we change the wording slightly. When you hear that change ask yourself why did I change it? Was it because I picked up a new expression or word from another discussion or has my view changed? In our case “capital markets” became “institutional financial services” aka it’s not just the capital markets areas that I came from that have critical problems to address, but the whole enterprise. Our TAM from fund one onward got significantly larger as a consequence.
5) Success does NOT breed success by itself (or always be fundraising)
The best time to fundraise is when you don’t have a fund to raise or a need for funding. One of the key mistakes I made from fund one to fund two was treating them as two very discrete events. We didn’t invest enough time in keeping potential future investors aware of our development and our success. You can be the best performing fund of your vintage (fund one is for us on distributions and at the time of writing has been for multiple successive quarters) that doesn’t mean that capital will flood through your door. You need to always be actively marketing that success.
6) Physician heal thyself (or the tale of the cobbler with holes in his or her shoes)
Don’t be afraid to assess yourself as you would assess any other company coming through the door. What is the quality of our materials, our story, our product, our team, our go to market?
7) TEAM TEAM TEAM (part one)
This one is embarrassing. Any VC will tell you it’s about team team team. When we first set up the business I would get asked “is it about team or product in our space?” and I would say “any VC will tell you it’s team team team but in our space its team and product in equal measure”. I’ve eaten my humble pie, its “Team, Team, Team”, I guess some things you just have to learn and prove to yourself.
8) TEAM TEAM TEAM (part two aka it takes a village)
Building any scalable organisation is about applying the basic economic principle of Comparative Advantage (Ricardo 19th Century) while more recently Metcalf’s law teaches us that networks scale as the square of the nodes both being super relevant to building a Venture team. As a founder, it can be genuinely scary to let go of directly controlling the messaging and external interaction but these are the bonds that tie us to very constrained growth. Illuminate’s network would not be what it is today without the efforts of the scaled team around me, nor would our domain expertise be a fraction of what it is today.
9) It’s the squeaky wheel that gets the grease (which does not correlate to the venture power law)
It is a simple fact that the squeaky wheel gets the oil: the problem children will take the time if you allow them. Working out how to optimise time allocation is in my opinion almost harder than how to optimise capital allocation. VCs like all entrepreneurs are (generally) both capital and time constrained: both are finite resources. If you believe you are genuinely a value added investor then the majority of that time needs to go to the best opportunities, however time is called almost inversely to opportunity. I do not know of a name for this rule so have started to call it Beeston’s Grease Gun rule and I encourage our whole team to challenge if the grease is being applied in the right place in our portfolio discussions. By the way, the same “Squeaky wheel” problem applies to potential investors that never convert, team members that don’t work out, candidates that never join ad infinitum.
10) The Power Law Matters (but this is also a risk management business)
It is widely accepted that venture is about the power law of venture returns. Personally, I believe that the power-law is very important but as a former derivatives trader I am also passionate about the management of risk and return. I believe that it is super important to realise that the two are not mutually exclusive. It never ceases to amaze me how many investors only care about the “X” multiple you propose to return rather than the quality of the “X”.
11) It is a long journey (the irony of Venture)
In a world where the rhetoric is often dominated by the call to “fail fast” the great irony of building a venture firm is that the only way to fail fast is to fail to raise a fund. Once you have raised a fund unless you then can’t actually deploy it the journey is only going to be a long one. As I mentioned in my LinkedIn post we returned fund one (2015 vintage) in early 2022, around 6.5 years after the first close of the fund which was over 8 years after starting out to launch the business. That is a long journey and that in itself doesn’t seem to be representative: per the Cambridge Associates Q2 2023 data you have to go back to 2014 before the median or mean European PE and VC fund of each vintage has paid out over 1x investor capital. Be very aware that even for those that do it well this is very much a deferred compensation business.
12) Nothing will ever taste as sweet as returning your first investor’s capital
Your first fund investors are special. They are the ones that backed you at the outset. When your track record was based on you not on fund metrics. It was opaque at best, your team was new, you were at the larval stage of trying to become a butterfly. Being able to return their faith in capital, with returns and more to come is a truly fantastic feeling. I doubt that a 20x fund would feel so good but if we ever have one, I will let you know.
13) You are going to make mistakes. Lots of them.
Building any kind of business is a risk. You can’t take risk and get it all right. As a VC you get the opportunity to make more mistakes than most…you can make all the usual founder mistakes (business process, advisors, hires, PR, every element of the business) and you can also make the mistake (multiple times!) of investing in the wrong businesses too. This is all in the nature of entrepreneurship with a few that are specific to venture investors thrown into the mix. The first few painful errors really can cause both serious business pain as well as serious personal introspection. If this was easy to get right everyone would do it. It would be very easy to self-flagellate over such errors and become incapable of making further decisions (everyone of which is a risk). There are two keys here in my opinion, one is to avoid making any potentially fatal mistakes (easier said than done) and secondly to ensure you build a learning culture for the whole team. We run a quarterly awards ceremony for the team, one of which is the so called “Numpty Award” for doing something stupid. It is our hope that by creating a culture where it is genuinely shared that mistakes were made, that we learn from our errors, and importantly don’t foster a culture of hiding them.
14) No one is going to tell you that you have “Emerged”
Last but not least is the interesting philosophical question…when has a VC “emerged” from being an “emerging manager”? To the best of my knowledge there is no certifying body or at least if there is I do not yet have a certificate on the wall to say that I (or we) have “emerged” from the primordial soup of emerging venture managers.
The last decade has been a remarkable learning journey and yet amazingly (per point 11) given a fund takes time to raise and a standard fund life is a decade itself we are not yet even at the end of the first fund lifecycle. In fund one of three we still have half the positions remaining following a number of successful exits so we are still someway from writing the post-script even on the first fund.
I greatly look forward to the learning of the next decade to see what our team achieve from here supported by our many great industry partners for whom I remain extremely thankful.
Thank you for reading
Mark
p.s. For those that are interested the original Linkedin Post that led to this blog can be seen here.
