Almost one year ago, I was about to graduate from my MBA at INSEAD amidst a pandemic, finding myself at a crossroad of various career paths. I was mainly debating between a career as an entrepreneur or as a venture capital investor (you can read more about it here). Almost nine months ago I joined Rocket Capital, an early-stage first-time VC fund, at the time when it was just about to start fundraising its first fund. Little did I know that I have embarked on a journey which combines the agility and fast pace of a start-up with the long-term vision and thought leadership of venture capital. As we are approaching our first close, I look back to reflect on the key lessons learned both for my professional and personal development.
There is a big difference between joining a well-established venture capital fund with strong track record and good reputation and joining a team of first-time managers about to fundraise their first fund. After perusing thoroughly ‘Venture Deals’ (considered the venture capital bible) and going through my ‘Introduction to Venture Capital’ course materials from Wharton Business School, I was up to speed on how venture capital works in theory. Yet, there are a few priceless lessons I learned on the job, which are mainly applicable to first-time fund managers and funds:
1) Narrow down your investment thesis. When I joined Rocket Capital in July 2020 our investment thesis was still work-in-progress. It is very important for first-time VC funds to differentiate themselves by adding more value than well-established funds, which is harder than it sounds. Rocket Capital’s main value proposition to start-ups is expansion to Asia. This is facilitated by Rocket Equities, a sell-side advisory company managed by the same founders in Philippines, serving corporate clients in Southeast Asia.
Initially we focused on early-stage ventures with a B2B SaaS business model in certain verticals where we saw high demand for software solutions in Asia such as software enterprise, fintech, esports, adtech and medtech. Yet, our investment thesis was broad as every other European VC fund invests in B2B SaaS business models. Hence, we decided to dedicate each of our funds to a specific vertical, starting with esports, where we saw highest need and use of our value proposition, i.e. expansion to Asia. Now our value-add was clear — we offered startups smart capital and expansion in one of the fastest growing esports markets, and we offered investors diversification via exposure to a still moderately underfunded market.
2) Create your brand as early as possible. In venture capital your brand as an investor is everything. Well-established funds have spent years building a reputation as sophisticated investors which attracts both LPs and high-quality deals. First time funds, however, often find themselves in a Catch-22 situation both when it comes to fundraising and deal sourcing. LPs invest in general managers that have a strong track record of prior investments. Likewise, startups like to fundraise from a well-established VC fund with strong connections in the industry. There is one way to overcome that Catch-22 situation and that is by creating your brand as a thought leader and expert in the sector you are investing in. First, we created a lot of proprietary research content, which was helpful for both investors and startups operating in esports. Second, we initiated discussions around the future of esports via starting a podcast series called ‘Esports & Beyond’. Last, but not least, we established ourselves as an esports investor, which increased inbound deal flow.
3) Build long-lasting relationships with investors and founders. Venture capital is an industry that is built upon relationships and network. The average day of a venture capital investor is full of meetings. Although a very tiny fraction of those translates into investors becoming LPs when fundraising or leads becoming portfolio companies when deal sourcing, one should never turn a meeting down, because it might lead to a good relationship sometime down the road.
When it comes to fundraising, book as many meetings as you can even with investors that are not naturally a direct fit to your investment thesis. Some may not invest themselves but make useful introductions that translate into potential investors. Some may monitor your performance and decide to invest later in your next fund once they have seen a proof of your investment thesis and good track record. Some may simply give you advice on how to perfect your pitch. Every meeting counts.
When it comes to deal sourcing, it is not very different. Initially, we had an outbound-only deal sourcing policy with the investment team reaching out to deal prospects that have also passed our internal data science screening algorithm. After a while though we realized that screening inbound deals was just as valuable as it gave us a sense of the market trends. My main lesson here is to never turn down a meeting with a prospect and reply as quickly as possible to schedule that call/meeting. When asked how US funds differ from European ones, many entrepreneurs still say, by responding faster to an email.
Prior to my role in venture capital, I spent about five years working as a sell-side equity analyst in London. Although both roles involve making investment decisions and recommendations, there are quite a few differences between public and private markets, and early stage and well-established ventures. Here are some of the lessons I learned as an investment professional in venture capital:
4) Keep a mid-to-long term view. When you say you provide a long-term investment recommendation as a public equity analyst, what you really mean is that your view applies for the next reporting year or until it is officially changed which often happens before the end of the reporting year. As an equity analyst (both sell and buy side), you always have the comfort of the option to change your view and subsequently, reverse your investment decision.
Once you make an investment decision in early stage investing, though, there is no such option. Hence, it is very important to keep a mid-to-long term view when investing and remain patient on seeing through the results of your investment decisions.
5) Stay focused and invest with determination. As a public market equity analyst your investment recommendation is mainly a result of fundamental drivers, financial performance and valuation. Yet, the reality is that financial performance often dominates your analysis, and your price objective is a result of a multiple sheet excel model with financial projections.
Hence, as you start screening early-stage companies (Seed and Series A), with limited historical financial performance, there is always a risk of analysis paralysis, i.e., overthinking and overanalyzing the financial performance, while overlooking the assessment of the product and team. Financial analysis is extremely important at every stage of equity investing and going forward I truly believe that we are moving in a direction of finding a common denominator to compare and analyze early-stage ventures via data science. Yet, it is important to also take into account qualitative factors such as product and team, stay focused and invest with determination.
6) Working at a first-time VC fund is a lot like working at a start-up. In hindsight, I was very lucky to join a first-time, small VC fund as its culture and day-to-day operations resemble a lot those of a startup. To name a few of the similarities: i) day-to-day operations are fast-paced, dynamic and agile, no day is like the previous one; ii) culture is flat and self-driven; and iii) the brand is yet to be created and established. In summary, the sky is the limit.
There is a lot I am looking forward to from deploying the capital of our first fund to building Rocket Capital’s brand, dive into the fascinating world of esports and support our portfolio companies in their expansion to Asia. The last nine months have been a steep learning curve, but this is only the beginning and I am looking forward to what a career in VC has to offer. If you share my passion about venture capital and investing or just want to connect, please reach out at firstname.lastname@example.org. You can also follow Rocket Capital on LinkedIn, Twitter and Medium.