5 lessons from a year in VC
Heading over to the dark side...
I just wrapped up a year investing alongside the incredible team at Alumni Ventures. For anyone interested in learning about venture capital, I highly recommend their Venture Fellows program. It’s a great way to get your feet wet and learn from some of the best in the business.
As an operator, I had an image in my mind about what it was like to be an investor. And it pretty much looked like this:
All jokes aside, I didn’t know what to expect. I wanted to broaden my view of the tech landscape and work with founders, so I jumped in headfirst and kept an open mind.
This is embarrassingly naive, but I was surprised at how hard it was, hard in a different way from working at a startup. There were many learnings along the way, but I’ll spare you the dissertation and share my top five.
1. Having a good product is not enough
As someone who built their career with a product mindset, I definitely over-index on slick interfaces solving cool problems. But the product is only one part of the trifecta you need for success. Team and market are equally (if not more) important. You cannot build a successful company without a credible, cohesive team, or without a market large enough to juice those big returns. I’d get way too excited about a cool new app only to be gently reminded that the market was too small, or the team didn’t have the skills to execute on the vision. Which is a nice segue to my next learning.
2. VC is not a fit for all startups
Everyone wants to be acquired for $1B like Instagram, but in reality, those companies are one in a million billion. I often saw startups seeking tech valuations that just didn’t. have. good. tech. Or really any tech at all! Unicorn valuations are alluring, but venture capital is not a catch-all for startup investing. It is a focused strategy looking specifically for those “one in a million” companies.
Being naive to your ability to scale is a death trap for founders. I wish other types of investment models (bootstrapping, etc) were more well-known and respected. VC is not the only way to build a successful business.
3. The highs are higher but the lows are lower
When you work at a company, your wins and failures are tied to that company.
When you have 20+ companies in your startup basket, the big wins feel huge, but the losses feel incredibly painful. The feeling of watching a portfolio company go through a successful IPO is amazing. But chances are, that at the same time, other companies are struggling. Learning to balance and manage your energy across a portfolio is critical to keep yourself from burning out.
4. You have to trust the founders
Fred Wilson wrote a great piece on why operators struggle to succeed in investing. He calls it “avoiding the temptation to operate.”1 When you work at a startup, you work on one thing all the time. So when you see a problem, you fix it. It’s hard-wired. I’d call a founder and spend 30 minutes talking about customer problems, only to hang up and realize I hadn’t asked who was on their cap table.
When you are an investor, it is not your job to solve everyone’s problems. That’s not to say that you can’t be an asset to your portfolio companies (and I believe the best VCs offer tangible value outside of fundraising) but it is critical to your long-term success to know where to draw the line.
5. It’s a long game
You are trusting your money and your reputation to other people. You are going to miss out on deals. You are going to be told “no”. Your portfolio companies will struggle and fail. You don’t know how things will turn out for 10+ years. You will make many bad investments. It can feel very lonely at times. Patience in this industry is a key and underrated skill.
Contrary to my Wolf of Wall Street assumptions of cocktail parties and ringing the NYSE bell on IPO day, it is not easy or flashy. It takes grit, determination, and thick skin to last in the industry. Less than 20% of deals produce 90% of returns2, and over 90% of startups fail. So what’s the upside?
The cliche thing to say is that as an investor, you are shaping the future. But after this experience, I believe a better view is that you are shaping the people who are shaping the future. You get to support and witness the endless optimism of founders, and take part in their journey. You get to be a part of their team.
Which brings me to my bonus learning: VC is a team sport. And who doesn’t want to be a part of a winning team?
https://avc.com/2017/05/investor-vcs-and-operator-vcs/
https://www.toptal.com/finance/venture-capital-consultants/venture-capital-portfolio-strategy