On the Fuzzy Logic of Venture Capital
Or “What an 8-Week Fellowship in Deep Tech Venture Investing Taught Me”
Setting: April 2020. Earth is in an indefinite self-quarantine.
At Rise: Some have stepped into their kitchen for the first time, some have hastily converted their living rooms into home gyms; I — an aspiring venture capitalist — have found my way into an 8-week fellowship in deep tech venture investing. Different strokes for different folks!
I got lucky — got selected for the Pi Ventures VC fellowship — it promised an immersive ‘All practitioners. Zero gyaan. All case studies.’ experience, with a faculty of top-notch industry veterans. My fellow fellows resided across four continents: an illustrious group of tech startup founders, strategic consultants, product junkies, and investment noobs (my words, not theirs!).
12 fellows — 14 speakers — 8 weeks — 21 sessions.
Throughout the fellowship, several of the case analyses left our group in ‘hung parliament’ situations, making any attempt at a VC playbook hard to conceive.
tl;dr — “We’re going to talk about a couple of frameworks, and at the end we’re going to say that frameworks don’t matter.”
#1: Do you really want to be here?
Almost every speaker started out their session with a word of caution before humbly walking us through their battle scars of cycles of raising, investing and returning.
There are numerous articles on how venture capital has the same amount of success as whaling, the deeply ingrained power law thinking in the VC industry and the buyer beware stats/demystifying VC .
Venture Capital will always be one of those fields that tests your mettle;
- the optimist vs. the pessimist,
- the rational vs. irrational,
- the art vs. the science,
- to follow on vs. not to follow on
#2: Not for the faint hearted!
Nobody tells you about the ugly sister pretending to wear the glamorous VC glass slipper — Fund Economics!
You are a new venture fund, assume you don’t have the funds of the Prince of Brunei or the pockets of an established global VC backing you — on average you’ll have upwards of 50 LPs funding you, each with their own distribution waterfalls.
Spoiler alert — It’s all done on excel spreadsheets.
Distribution waterfalls, fund flows, hurdles & catch-ups, TVPI, DPI, RVPI — you look under the hood and realize you need a solid understanding of the economics that go into making it successful.
#3: Emotional and Intellectual honesty
If VC investing comes down to a game of trusting gut, the obvious question is how does one build that? Where does that trust come from?
“We don’t back people who we like, we back people who can make money for us”
…and they come in all shapes and sizes (the sales Founder, the tech Co-Founder, the cut throat Co-Founder, the hustler Co-Founder, the visionary Co-Founder). This notion of intellectual and emotional honesty flowed through every session.
Seek it. Understand it. Embrace it.
*from your *
Founders | LPs | Partners
There are no right or wrong answers, also opinions change and they must change — and if AI has taught us anything, it is that a system learns when it makes a decisions and gets some feedback.
#4: Success = Prepared minds meets opportunity
One of the most informative sessions was most definitely on developing a thesis. Turning data into information, and information into insights. As an investor, what we’re looking for is not specialized knowledge but rather the ability to ask the right questions should the opportunity present itself.
Goals of the thesis:
- Identify large enough markets — in revenues not just valuations
- Identify long term trends — when does value realization really take place?
- Be prepared — scouts honor!
- What is our unique point of view — asking the right questions
- Conviction!!! Foundation of thesis helps to keep faith through the ups and downs.
#5: What is the ‘penny-drop’ moment?
Evaluating tech and product comes down to forming a hypothesis and then finding a way to validate that hypothesis.
In the context of deep tech, it really comes down to identifying the core problem. Answering questions like “Will it make a 10x impact for the customer? Why now? Why will they win?”
They introduced us to a framework that I’ve found to be incredibly useful when thinking about simplifying startups is: at its core, every startup is trying to solve a demand and supply problem!
The nuance in this framework lies in understanding the ‘momentum play’ of the axes — startups might start in one box but move towards another. Markets themselves move cyclically across axes.
#6: Exits are the holy grail of VC.
Falling in love is easy, breaking up is hard. Making an investment is easy, nurturing them and exiting them is hard.
In this world, where the “go big or go home” mentality holds strong, what does one do with the long tails? So many things go wrong, so many things change over time,
From the point of view of the fund manager, at the end of the day EVERY COMPANY in your portfolio needs to exit. No other way.
Keep in mind though that overly bold visions don’t compromise your founders. Read this great counter perspective from founder’s POV.
#7: Other honorable mentions —
- Reference checks; Founder, fund manager, tech — no one is spared, primary research is the way to go. Many of our case studies involved reading through pages and pages of reference check call notes to come to a decision.
- A good CEO is worth his/her weight in gold — a true leader is one who has followers.
- You are never going to be the smartest person in the room — but you have to become the best listener.
The rules of this game are fuzzy and elusive. Tread cautiously, and with a thick skin.
Thanks Pi-Team!
