What is the biggest secret in venture capital?
From the Forgive and Forget rule to how to hunt VC deals, here are twelve answers from VCs and venture backed founders on the best kept secrets in venture capital:
- Vcs Have to Sell Your Idea to Others Too
- Small Vcs Cannot Form Your Business Foundation
- Learned from the Failure
- Venture Capitalists Live by the Forgive and Forget Rule
- Hunting for Vcs Deals
- Better Publicity and Exposure
- Stay Friendly to All, Whether You Invest Or Not
- The Illusion of Full Autonomy
- Venture Capital
- Vcs Offer More Than Just Capital
- Venture Capital is Just a Tool, There Are Other Options
- A Focus On the Future of Tech
Vcs Have to Sell Your Idea to Others Too
Many entrepreneurs believe that when pitching to a venture capitalist that they hold the ultimate power, but maybe the best-kept secret is that most VCs have to answer to other investors and is the reason why you need to keep your pitch simple. You may meet with one person or a small group of venture capitalists believing that you need only to interest them, but that is not how most VC groups are structured as they are a conglomerate of many investors.It is important to understand that once you are done pitching your business concept, that those people have to in turn, sell your ideas to others in their group. So making materials understandable, being clear on your concept, providing concrete numbers are critical if they are going to communicate your ideas correctly. In knowing the secret that VCs are not one or a few people, you will be better prepared to sell your idea and acquire your funding.
Small Vcs Cannot Form Your Business Foundation
The big venture capital funding groups (VCs) can be intimidating and leads many to seek out smaller ones, but seeking funding from the larger ones can prevent you from going into your startup venture undercapitalized. One of the biggest mistakes that entrepreneurs make is they underestimate how much it will cost to get their business off the ground, and this leads to them to go to smaller VCs, as it is often easier to get that little amount of funding that they think they need.However, smaller VCs are often not able to provide the funding necessary to build the majority of the foundation for a business, and are usually focused on owning small pieces of companies rather than being the core of an enterprise’s financial make-up. So while large VCs may be more intimidating and are more difficult to convince to invest, they are also able to write you the check that you will really need to get your venture up and running right.
Learned from the Failure
To get venture capital, you have to be a serial entrepreneur. This means that you should have failed at least once. The VCs believe that a serial entrepreneur has been unable, learned from their failure, and returned to prove his worth. This kind of solid character is significant to venture capitalists. If you are a serial entrepreneur, you have a better chance of getting venture capital because they will be able to trust you as someone who can handle a lot of pressure and stress and work hard to succeed.
Venture Capitalists Live by the Forgive and Forget Rule
Let’s say the company you avidly supported goes south. It’s considered bad practice for other partners to jump on your case unless your track record is less than ideal. Eighty percent or so of venture capital investments fail or have little or no return on invested capital. It happens to every venture capitalist on a consistent basis. You just have to be sure that your wins more than make up for your losses. Similar to an athlete that has a bad performance on any given night, venture capitalists have to have a short memory and focus on the next big investment.
Hunting for Vcs Deals
Dealing with VCs for years, I’ve found that the best deals come from my network of trusted investors, entrepreneurs, and professors. My peers and partners help me quickly shift through opportunities and prioritize those I should take seriously. So now I can reveal one of venture capital’s best-kept secrets. VC firms are pretty varied from individual VCs. Individual VCs do not do much, so they are more risk-averse than you think. A typical VC partner only does one to two deals per year. Only one or two; yes, you heard that right. Hence, their values must be successful, so they want to avoid taking so much risk. We should rely on our instincts when making business decisions, but we also ensure we have the correct information. Here are factors that helped us determine whether a particular move in VCs is right for us, such as your business structure, securities regulations, local laws, and any specific issues impacting our industry.
Better Publicity and Exposure
One of the best-kept venture capital secrets is improved publicity and overall exposure. Most venture capital firms will have access to a PR team that can do wonders for adding credibility. The same goes for their access to media contacts and maybe even influencers. With all the extra attention provided through venture capital, a business is sure to make a splash in their market.
Stay Friendly to All, Whether You Invest Or Not
Never call a baby ugly in this business—you never know when that supposed failure company you passed on becomes a big hit. It happens more often than you might think. Try to stay friendly to all. Never burn your bridges and remain cordial with everyone you are in talks with. You might get a chance to invest in the founder’s second coming.
The Illusion of Full Autonomy
Venture capital can be a tricky topic for a startup founder to navigate. There are many insider secrets and various investment stipulations. Still, venture capital firms make millions of dollars every year by choosing the most promising companies.As you can imagine, there are a large number of rules a venture capital firm must follow when investing in a new business, but what is widely unknown is venture capitalists actually have far less autonomy than they convey.A venture capitalist does not have full autonomy over the financial decisions the firm makes, though they may say they do. Of course, a startup founder wouldn’t know this because no venture capitalist shares how little autonomy they actually have.Most venture capital firms have strict rules about where they can provide funds. A venture capital firm may provide a certain amount in the initial startup, and provide very specific amounts of funding in certain areas such as building costs, inventory costs, etc.
Less than 20% of venture capital funds deliver returns
Less than 20% of venture capital funds deliver returns that are sufficient to satisfy the needs of limited partners (2.5X+ cash on cash return). Even fewer (10%) individual venture capital partners match the demands of the limited partner. But for investors who are fortunate enough to invest in them, the top 1% of venture capital funds can be transformative. Consider Accel IX (Facebook) or Lowercase Capital’s first fund (Uber & Twitter). Compared to other asset classes, it is a small business, with just approximately $30 billion going to venture firms annually. In contrast, private equity buyout businesses raise over ten times as much money.
Vcs Offer More Than Just Capital
If a VC likes a deal they may pass on investing capital resources, but offer access to their contact portfolio which could be even more valuable. When I look at a deal, the first thing I’m trying to do is find vulnerabilities in the business model. If I identify gaps, I may have relationships that could easily step in and bridge those gaps but I usually only offer that kind of advisory if the entrepreneurs ask. In many cases, VCs are strategic partnering hubs first and foremost, capital investment sources second.
Venture Capital is Just a Tool, There Are Other Options
Venture capital is just a tool, and even though it is an option for businesses to take, it’s important to remember that it isn’t the only one. Thanks to the success of online crowdsourcing on websites like Indiegogo and even long standing TV shows like Shark Tank, entrepreneurs today have proven again and again that unconventional avenues for generating investment continue to provide fruit and for many are the only shot at success a business will ever get.
A Focus On the Future of Tech
Tech is an industry that has been heavily funded by venture capital for decades. Even with a slowing economy and tech layoffs, there are still many venture capitalists who want to have a hand in the development of the tech industry. About a decade ago, apps like Uber were cheap for customers because of the investment of VCs. With less VC involvement, prices have skyrocketed and consumers are increasingly unhappy with the service. The next tech target for VCs is going to be artificial intelligence. As AI continues to develop at a breakneck speed, more companies are using it for their day-to-day operations. This has attracted more VCs to the AI space. Essentially, venture capital is always focused on the future.
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