The role of communication in the VC and startups universe
„While people who follow the venture capital world spend a lot of time talking about deals, everyone who’s successful in this industry knows it’s first and foremost about people.”
Matthew Stotts, partner at Tenor
The venture capital and startup ecosystem is not only about entrepreneurs having the most creative ideas and the right sets of skills to implement them successfully, and investors smart enough to see these opportunities before others. It is much deeper than that. It is a constant exchange of information and knowledge and building up long term relationships. In other words, it is all about people and communication.
John Donne wrote: “No man is an island entire of itself”. This quote applies to the ecosystem in which we operate. One of the most valuable assets of a VC firm is its network. For instance, our network in MOC consists of several hundred people from all current and previous investments, C-level specialists and managers, and a huge number of VC funds. These people are a gold mine of knowledge and experience for our portfolio companies and for us. Despite outdated stereotypes, VC funds often work together. They are a source of projects for each other, they consult in case of doubt, create investment syndicates and look for further financing rounds for their portfolio. Given that VC funds are responsible for investors’ money, they are particularly sensitive to the quality and reliability of the information exchanged. Unlike in any other business reputation and trust are considered the most important currencies in this case, and losing them will cause you to fall out of the game.
Internal communication in a VC fund
Usually, the level of formalization of a company depends on its maturity and size. The smaller ones pay a lot less attention to process setting and internal procedures. The larger ones are more based on organizational procedures and structures. Apart from the largest VC funds, in which I will not delve into a structure, smaller funds usually consisting of several people operate in rather an informal way. However, there is one area where most funds pay special attention. Data collection and information flow — both closely related to communication.
A VC fund is as good as the experience of the people working in it, compounded with their network. Projects come to the funds through various sources. A significant proportion of them does not pass the preselection performed by a team member. The more interesting ones are analysed further in project groups. The quality and pace of the fund’s work largely depend on the exchange of information in the area of past and present projects combined with effective analytical work of the entire team. It may happen that one of the team members has already analysed a similar project or that someone may notice invisible for others potential based on their previous experience as entrepreneurs, managers or investors. Therefore, funds take proper communication and a healthy flow of information very seriously.
Decision-making process
Communication between the “opposite” sides of the table is equally important. For the last seven years, I witnessed dozens of transactions, and even though the investment process is a standardised procedure, each time is unique. The decision-making process consists of assessing many elements such as founders, product, technology, market, traction, potential and others, but at MOC we also pay attention to the quality of communication, mutual understanding and respect. The quality of the materials provided at the initial stage of project analysis and the founder’s responsiveness are also part of the assessment. Founders’ ability to gain trust and confidence has a direct impact on the fund’s investment decisions. During subsequent meetings, the thread of mutual understanding and relationship dynamics develop.
According to a survey of 98 VCs and 121 founders conducted by Henri Deshays at Newfund and Owen Reynolds from the University of Chicago, “founders and VCs both report personal relationship and chemistry with the counterpart as the single most important decision-making factor”. Again, very much a “people business”.
Storytelling skills
To gain our attention in MOC, we need to see that product or service offered by the company has a definite economic advantage. This is a must-have, but founders also have to convince us that they have what often determines success or failure — storytelling skills. Even creators of remarkable technologies may struggle to raise financing if they are not able to build a great story and vision around it.
Some people believe that storytelling is all about fundraising, but a good narrative is crucial to almost every aspect of building a great company: recruiting the best talents, building a community around your business, acquiring customers and business partners. Storytelling is the ability to master your communication skills by adjusting and rebuilding your story, depending on the target group in order to achieve specific goals. Even though it will be still the same story, founder will send a different type of message to investors to raise capital, customers to sell the product and employees to keep them motivated.
Marriage with an expiry date
From the first moment I heard the phrase “marriage with an expiry date”, I knew this is the most accurate term to describe the relationship linking the VC Fund with its portfolio company. As in marriage, we are signing the investment agreements for good and for bad, hoping for the best, but being aware of the bumpy road ahead. Again, communication plays a decisive role here. The is no place for a “Fake it till you make it” strategy. We all know the extreme case of Elizabeth Holmes, who using this method has raised hundreds of millions of dollars from investors. I am not referring to cheating or concealing failures. I want to emphasize the value of reliable reporting and open, trustful communication. It is worth to report not only successes and KPIs but also speak out about difficulties and failures. Being aware of what failure results from is valuable in itself because it allows to learn from failures. However, if a startup wants to use the full potential of smart money, the investor must know the full picture and the true conditions of the company. Transparency is fundamental.
The VC investor’s role is to be a sparring partner, to support but also challenge founders. Based on the nature of our work, we have some degree of a helicopter view on business and the markets, and many of us have been in in the founders’ shoes before. We often know what solutions or strategies work because we have seen them having been tested in similar situations in the past.
Communication is a two-way street
Interpersonal communication is nothing more than an exchange of information between people. Requires the presence of at least two of them. Its purpose is to exchange thoughts, share knowledge, information and ideas. Interpersonal communication is two-sided and interactive, which means that participants in the dialogue can have two roles — they can talk or listen. Above, I focused mainly on the “talking”. Now I would like to focus on the listening part.
Listening undeniably has a positive impact on problem-solving skills and, above all, builds trust. By truly listening we are able to understand better the people we interact with, regardless of whether they are business partners, clients or investors. It is a skill that anyone can learn. Listening plays a significant role in professional relationships building.
As Dalai Lama said “When you speak, you only repeat what you already know. And when you listen, you have the chance to learn something new”. A good listener should gather insights and understand the speaker’s point of view, but most important is what will happen later. A good leader can listen to feedback, and while talking to employees, clients or business partners is able to identify the right messages. He has a far better chance to achieve success because i.e the products or services offered by the company will be better tailored to the needs of customers or he will follow the advice given by advisers or investors.
Startups sometimes see Supervisory / Advisory Boards as a necessary evil, while they should see opportunity. Such Boards are typically composed of founders’ and investors’ representatives and sometimes external advisors. This is then an opportunity to look for solutions and test ideas together with experienced partners. It’s an opportunity for a founder to strengthen the relationship with investors, but also a chance to prove themselves in the eyes of VC fund. When investing in a startup, a VC is aware of the risks and knows how many elements make up the company’s success. In the world of startups, Mike Tyson’s quote “everybody has a plan until they get punched in the face” has become iconic. It is important how leaders deal with adversities and failures and whether they draw conclusions from them. A founder has a regular opportunity to discuss the current situation of the company with investors. I can’t understand why it is so common for startups to skip the “What went wrong” section in reporting. Once again this is an excellent opportunity for founders to gather feedback and find the solutions while strengthening relationships with investors. We’re playing towards the same goal. We’re in this together. Your success will become our success, therefore the more we know, the more we, investors, are able to help.
Venture ecosystem is a people’s business. How strong, it depends on the quality of communication and strength of relationships we’ll build along the way.
Thanks to Marcin, Jacek, Piotr and Michał for the feedback on the initial iterations of this blog post!
