What New VCs Can Learn From Startups & The People Who Make The Difference
As samir kaji pointed out, there have been surge of new Micro-VC firms, with nearly 500 first time funds worldwide.
What’s more interesting, as noted by Yannick Roux, is first-time funds are able to outperform non-first time funds, even though they have to take more risk to do that.
Just like startups have to be very creative and follow a high-risk high-reward strategy to be able to take on incumbents, new VCs should take the lead and follow a different strategy.
It’s not a secret, top VCs always have access to the best deal flow, as being funded by them gives startups a big push forward, in a similar way joining a top accelerator (like Y Combinator, 500 Startups, or Techstars) does.
If building a great platform (like Andreessen Horowitz has), or investing in hundreds of startups (like Dave McClure recommends) aren’t an option, new VCs should find a way to spot the best startups before everyone else becomes aware of their potential.
The people that makes the difference
Provided the potential ROI, the round size and the sector of a startup makes sense to invest in, most early stage investors will agree the team is the most important factor to assess a startup potential.
Instead of checking the typical boxes of whatever you may consider a “complete” or “ideal” startup team (everyone has a different definition) like most investors do, I recommend a different approach.
“A few key people make all the difference in any company — no matter how big or small” — Mark Suster
Like Mr. Suster, I also believe a small number of people are the ones who make the difference in any company.
In my opinion, there are two main profiles who fall into this category.
Many of the most successful companies had one or both profiles as founders or early employees, which reinforces my believe that for extraordinary outcomes you need extraordinary people.
I call them the brain and the visionary.
The brain
Brains are very difficult to define, as they are all very different from each other, and you can find them in every sector or field of expertise.
To give you a simple analogy, brains are the equivalent in talent of what unicorns and decacorns are for startups.
In other words, they are extremely rare individuals with massive potential.
Here are a few of the characteristics I found most brains share:
- A high IQ. The best ones have also an equally important high EQ.
- An insatiable hunger to learn, driven by their curiosity.
- The ability to make the impossible seem possible.
- You never completely figure out how their mind works.
- They think and see the world in a different way than most people do.
- Good is never enough or satisfying for them.
- They don’t give a fuck about “how things have always been done”.
- They usually come from unconventional backgrounds.
- Some are famous entrepreneurs, but most are neither famous nor entrepreneurs.
Brains could easily be the difference between a unicorn exit or a startup that fails to deliver the expect ROI, or any return at all.
So, for investors it’s critically important to first, be able to identify brains in startups, and second, to make sure they stay committed for the long term.
Identification & retention
It may not seem that difficult to spot brains at first, but it is.
I’ve personally seen many A-players (including successful entrepreneurs and seasoned VCs) fail to recognize brains in multiple occasions, even when talking face to face, so it’s not easy by any means.
Many brains who are entrepreneurs have a hard time explaining what they do (as Geoff Nesnow also pointed out), as it may look counterintuitive for most people or hard to believe — like it’s science fiction.
Your best bet would be to hire a brain to do the assessment. The second best option would be someone who works or has worked with many of them.
If identifying brains is a challenge, retaining them is a much tougher one.
Most companies are nowhere close to have everything in place to attract brains, not to mention how few have figured out how to retain at least one.
The flexible and fast pace nature of startups gives them the opportunity to build the right culture and environment to attract and retain brains, especially the younger ones that haven’t been identified yet.
When negotiating the investment terms, it’s critically important to make sure brains have a fair piece of equity and other conditions are met to keep them for the long term.
The visionary
The second profile to look for in a startup is the one who is able to anticipate to the future changes of the market needs, and sets the vision for the company (and especially the product).
This person usually have a deep understanding of the problem the startup is solving, feels the pain of the customers, and a has good amount of knowledge about the market and the competition.
The visionary is key in the success of a startup, as the role has one of the biggest impact in the company, as it has a huge influence in the direction of the strategy, and where the company will be in the future.
The person with this ability is usually one of the founders, who also tends to be the one more focused on the product.
It could also be an early employee, but without clear commitment, it’s a potential red flag.
Another potential red flag would be when the startup doesn’t have someone who is clearly in charge and has the responsibility of setting the vision (for example, all founders want to contribute equally).
Since startups are long term investments, it’s hard to bet in one without the right person for this role, even if the founder team has a great track record for execution.
The competitive advantage
Why are these two profiles so important? There are three main reasons.
First, they are by far the hardest people to replace (if that’s even a possibility in the first place).
Second, because they account for a disproportionally big amount of the competitive advantage the startup has and will develop.
Whether it’s because of a great leader, a brilliant designer, an outstanding engineer, an exccellent marketer or sales strategist, an exceptional team builder, or being able to stay years ahead of the competitors in product development, they always contribute to build a huge competitive edge.
And third, because having them also helps attract more brains and A-players to the company.
Does that mean all startups need a brain and a visionary to succeed? No.
The exceptions are capital intensive startups with low entry barriers for competitors, whose success depends entirely on the capacity to raise more funding, the speed of execution and the ability to scale very fast.
These businesses require a very huge liquidity event, and if it happens, most of the returns will probably go to late stage investors, due to liquidation preferences and high dilution of early stage investors.
So, for VCs unable to follow on investments in the later stages, it may make more sense to focus on more capital efficient startups with innovation as their core advantage.
Thanks for reading, ❤ing & sharing. Feel free to comment below or contact me directly.
