EIGHT THINGS I HAVE LEARNED THE HARD WAY

Chasing Venture Capital Experience

You can’t fast track experience, but you can learn from others

Marc Penkala
The Startup
Published in
7 min readSep 18, 2020

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Venture capital experience and you.

Financial success in venture capital is based on experience and of course the hand of fate in combination with great timing. Nonetheless, without in-depth experience you might be better off spending all your money in an air-conditioned casino with some drinks and entertaining company surrounding yourself.

Within the past years I have been trying to extract and gather the essence of my venture capital learnings, mainly because I don’t like casinos. The truth is betting the odds is only fun if you have an unfair advantage, in venture capital the secret sauce is experience, for sure. I learned a lot from some outstanding people I have worked with along my journey, aside of all the crucial first hand experiences I made myself.

Therefore, I would like to share eight things I have learned the hard way.

1. Entry valuations don’t matter.

“Doing the right deal is more important than doing the cheapest deal.”

Entry valuations only matter up to a certain degree, at the end of the day startup valuation is a mixture of performance and the broader market climate for peer opportunities. Yes, generally it is beneficial to pay a lower valuation, though the cheapest deal is not necessary the best deal, especially in the context of exit potential.

The economic return of a venture capital investment fits a power law distribution, the outcome is binomial, startups succeed or fail. If you invest into a startup with a fairly low entry valuation and a low exit potential, you will be worse off than paying a higher entry valuation with a greater exit potential. Experienced VCs try to understand exit potentials, instead of negotiating entry valuations.

I think it is even worse to apply entry multiples, I am not really sure why multiples became a shortcut heuristic to estimate startup valuations anyways. Forecasting the size, timing, and risk of cash flows over many years is fairly challenging and highly inaccurate, even for later stage startups — relying on multiples as a proxy for the value of a startup is not the right way to go.

2. Understand your circle of competence.

“Know what you know and know what you don’t know.”

As a venture capitalist you are in a constant state of flux, figuring out different technologies, understanding multiple business models and assessing changing market dynamics. I want to be continuously educated by the best entrepreneurs, in order to plug my knowledge gaps and to discover new blind spots. Back in the days I used to worry that the rate at which I discover what I don’t know surpasses the rate at which I learn. And yes that is the case, though its not a problem, as long as you admit what you don’t know and get experts to help you out.

The main difference between a good venture capitalist and an extraordinary one is the ability to correctly evaluate selected businesses. Though, you don’t have to be an expert on every startup or industry, but you have to have the ability to evaluate companies within your circle of competence. The size of the circle is not relevant, but the boundaries are.

There are two main investing mistakes you should be aware of. The mistake of commission, making an unwise investment that you shouldn’t have made or knew enough to avoid, because it was outside your circle of competence. A mistake of omission is the opposite type of mistake, it is unwise to skip a great investment that was within your circle of competence.

3. Back thesis-driven entrepreneurs in the right markets.

“Look for thesis-driven and implementation-agnostic entrepreneurs.”

There are two types of entrepreneurs, the opportunistic ones building startups based on a trend (e.g. copycats) or an inefficiency they have identified and there are thesis-driven entrepreneurs working on breakthrough innovations based on an assumption on how the world or an industry will look like in the future. Both can be equally successful, to be fair.

Though, I prefer thesis-driven and implementation-agnostic entrepreneurs in pre-mature, as well as developed markets. This is very important as product visions and paths will change as an entrepreneur builds experience in a space. Furthermore, markets have an enduring impact on the opportunity itself, the ability to create and execute a thesis in a market is a key success factor.

Instead of being too obsessed with products, I learned to spend more time unwinding entrepreneurs and dig deeper into their thesis and implementation approach. the best investments I made so far were based on a gut feeling after I met the entrepreneurs. Business and revenue models change four to five times until a startup become successful. Therefore, it would be pointless to invest into something which is not static.

4. Become intimately aware of your biases.

“Bias is your worst enemy, evaluate and re-evaluate objectively.”

It is in our nature to use biases, heuristics and patterns based on experience, learnings and observations to process new information. Therefore, all of our future bets are kind of biased, based on our private and professional background. Venture capitalist have an inherent problem with biases, especially when it comes to successful and crappy investments, we simply try to match patterns all the time.

Though, a bias for curiosity, friction and serendipity is highly valuable. If you seek to be successful in venture capital you have to be open for new people, crazy ideas, not too obvious opportunities you did not consider before and of course unbeaten tracks.

Within the last year I have been trying to map my biases, especially when it comes to entrepreneurial profiles, preferred business and revenue models and certain markets. It has been very helpful for me and it changed the way I assess opportunities these days.

5. Timing matters, on multiple levels.

“Invest at the right time, in the right market with the right entrepreneurs.”

Timing is everything, it is as simple as that. Though, it took a while to understand and fully embrace this conclusion. I like to ask every entrepreneur I work with why they think that it’s the right time to launch what they do. Especially if they are not the first mover in a market.

The sense of why something matters right now and not tomorrow or whenever is more important than ever. Launching a startup to early or too late might lead to failure, no matter how strong the founding team or product is. The same applies to the timing of internationalization, financing rounds and general strategy related changes.

6. Focus on trendlines, not headlines.

“Invest in step-changes.”

A lot of hard work is needed to create a headline, it often takes years or decades to get there, most of the time this goes hand in hand with little recognition. Entrepreneurs have to build trendlines to get to headlines, at some point.

It is not too hard to predict changes that may happen in a three to five year horizon, the reward winning part is to understand what is needed to create the change for good. I think that step-change events are a strong signal for an investment opportunity that will eventually lead to exponential growth.

Step-change events are a core fundamental for outsized returns, though its tough to identify them early enough to be at the party before it actually starts.

7. Network, network, network.

“The champions league dealflow is network based.”

Network is everything when it comes to financing rounds, strategic partners, sales activities and of course key employees. One of the core values a venture capitalist brings to the table is his network, not only for the startups they end up investing in.

A venture capital network may include limited partners, industry experts, entrepreneurs, advisors, business angel and satellites. Satellites can be all of the mentioned above, they are the most important deal-flow source for every venture capitalist. The high quality dealflow is usually not a cold email, it is rather a warm referral or introduction though the close network.

Opening a single door to a relevant person or company can change the fate and success of a startup, as well as a venture capitalist. Ever since I have been trying to expand my network in multiple ways and directions, just to be prepared for the unknown.

8. A deal is not done, until it is done.

Sometimes it is harder to convince someone to take your money than it is to identify a good investment.”

You can promote and support a deal for months, supporting the the founding team in putting the round and the terms together and you might end up not investing after all, which can have multiple reasons. The truth is most venture capitalists have lost deals, particularly when they did not see the need to be ruled by the competitive dynamics of a funding round.

A deal is sealed and done, once the ink is dry. Venture capital is a long-term, unglamorous sales job. Especially if you are trying to close a top investment with an experienced founding team. Nonetheless, founders are and will be more important than venture capitalist, that is why we have to respect their decision, even if it means loosing a deal to someone else.

Last words.

I’m very grateful for the opportunity to work with a handful of outstanding and ambitious people. There’s always more to learn, as venture capital and entrepreneurship are moving targets — buckle up and enjoy the ride!

Any thoughts or questions? Reach out!

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About myself

I am a passionate and hands-on venture capitalist (+7y), serial entrepreneur (+7y), mentor and active angel investor. After 7 years of flying over 1.000.000 miles, spending 1.200 hours on airplanes, looking at 1.000 start-up pitches on all continents, I decided to gather some of my thoughts based on this extremely rewarding professional journey. Reach out and get connected!

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Marc Penkala
The Startup

Venture Capitalist @ āltitude | creating better access, earlier.