[ … or “How I met a VC partner AT A FARMER’s MARKET]
Part 2 of 3
This is the second instalment of my three part series into [my vision of] the VC journey. Feel free to read the first episode here.
So, here we go … through the looking glass once more:
In a Wonderland they lie,
Dreaming as the days go by,
Dreaming as the summers die:
Ever drifting down the stream —
Lingering in the golden gleam —
Life, what is it but a dream?
Fresh off the back of Web Summit where HOMYZE was part of the ALPHA class, I wanted to write a piece from the founder’s perspective on what is often considered the mythical world of the Venture Capital investor … where Unicorns(!) frolic and grapes are plucked from bountiful bunches and placed gently on the reclining VC’s lips, ready to be chewed up or spat out. The only two options.
For a lot of Founders, this is their perspective on what life is like as a VC. I believe it might be something a bit different .. not better, not worse. But different.
I should say that I have had no more contact with VCs than a thirty-something entrepreneur who only recently started a tech company would have had. I have had far less than many of my fellow ALPHAs, but for some reason I felt that I have comments that might help.
VCs just don’t say ‘No’
Even the most successful investor has a degree of self-doubt. Indeed, some of the best have a lot! That is why they don’t want to commit to a ‘No’ straight away. Time is the VC’s friend, and whilst some might use this as an aggressive tactic — knowing that terms may go in their favour as your runway gets ever shorter — for a lot of potential investors, this merely gives them an opportunity to observe your progress once you get ‘on their radar’; and for validation or traction to take place.
At the very least it gives a chance for a relationship to develop (see my other post) — it’s a win, win, win, win, win (technically speaking).
VCs have a vision
Sometimes the ‘roulette of raising’ just doesn’t seem to put the ball in your slot (so to speak). And then you hear about the “social network for imaginary friends” that seems crazy (at best) or limited (diplomatically) in its applications. How did they raise a $5m round? It may not seem like it, but this may be the result of a VC vision. Sometimes the founders themselves won’t even see it, but their proposed use case may not be the best one for the tech and team …
There will always be things you can’t control … but as per Episode 1, the best thing to do is to focus on your Company/self/product.
Trust their instinct and back their vision
At the end of the day, a lot of VCs are smart. This is not sycophancy — it is a mark of gratitude to them for allowing major moments to occur in some pretty minimal reads (not always <140 characters). So, if you’re in the market for some vision, read some Marc Andreessen, Benedict Evans, Bill Gurley, Fred Wilson or Bill Gross posts.
The thing about smart people is that they often like to answer and tackle the big questions. They paint futures for fun. So, sometimes they already have an idea of “the way things will be” and they are looking for the startup to put their version of reality into effect. See the previous point, and this might just be another reason why the first item on a VCs list for investment is ‘TEAM’.
Having said all of the above, VCs still need to justify decisions. Whether this be to investors, colleagues or their mothers. They might be allowed one pet project in a portfolio, but the majority of investments need to get varying degrees of sign-off from the team. If there is something you think is obvious that makes your company amazing — make it explicit. There is no such thing as a safe investment on a 20x return (see next point) but it is a lot easier to sell something researched, with momentum, constructed by a solid team than ask for money for a ‘Hail Mary’.
VC funds need to make money. No, seriously — they do. Who knew? Well, the VC partners did, and this guided their thinking on with whom to invest. Let’s look at some raw numbers, borrowing heavily from USV:
— The Fund raises $100m and has a 10-year life (though, this may be ambitious). The fund will make 20 equal investments (you can vary this as necessary).
— The Fund has raised money on the expectation of 35% returns to investors (you gotta risk to get reward)
This means that the Fund has to return 20.1x money (i.e. >$2 BILLION) at the end of 10 years (and cannot even invest all of it so as to allow for follow-on investment in companies that are performing!)
— Widely quoted is the 90% failure rate for startups (let’s see how that is impacted by the volume of new companies — it might not be negatively and we would also need to quantify the definition of failure. For the sake of this calculation we will just assume they get their money back on average).
— The remaining 10% (i.e. 2) of companies need to earn back ~19x the money invested. On average each one needs to be a billion-dollar investment. More precisely, the Fund’s share of that company needs to a billion dolars+. So, each company the fund invests in needs to potentially be a MULTI-BILLION DOLLAR BIDNASS.
As any founder knows, you only need one “Yes”. That might not actually be true, you probably need a ‘yes’ from employees, customers, funders, partners etc., but it allows you to put up with a hell of a lot of “No”s. And each ‘No’ can feel a little like a punch in the face.
But if the best breakup revenge is ‘a good life’ then the best startup revenge is ‘a good company’. And the simple fact of the matter is that [even!] VCs make mistakes.
I honestly believe that Airbnb would not be worth $25 billion+ if they had received their $150,000 easily. I think that some struggle is good for a company. In some ways, I hope so!
Of course, I don’t think you should (or can) build a great company out of revenge. It is not productive energy. But a ‘No’ does not mean your company is not good.
Believe in the wisdom of crowds
In the end, we are all working (within the for-profit space, anyway) for a bigger boss. Bow down before ‘discretionary expenditure’.
We are trying to skew odds in our favour, through A/B testing; and iterations; and customer development and paid social-media campaigns etc.. But effectively there is only one sure sign of success. Getting people to buy your product.
If people pay you money for your product (whether this is directly or indirectly), you’ve done well. Ok, things can be optimised, but at the end of the day, you’re tweaking.
From an investment perspective, it is probably best to be agnostic on whether things are ‘good’ or ‘bad’. Rather, VCs often talk in terms of whether things are ‘working’ or not. And that’s kind of the idea. Great ideas and great people can fail. Sometimes there may not be an obvious reason.
But products where people are signing up, handing over money and coming back are good products. Such is the wisdom of crowds. Because at the end of the day we are all trying to get some face time with the financial pharoah — the deity that is discretionary spending. And often access is only granted through his gatekeeper ‘Traction’.
So, what am I saying here? Nothing definitive.
Yes, there are definitely some contradictions. But that’s exactly the point.
VCs are people — they are doing a job, or going with their gut, or making mistakes. They do not inhabit some fantasyland of proprietary information, or come down from the aether for meetings with founders. Who knows you might be sitting next to one right now? Or you could even bump into one … at a farmer’s market!