Ways to invest venture capital
Le Prêteur et sa femme, Quentin Metsys, 1514
With time, you have probably become skeptical about the value-added promised by venture capitalists. You know, the whole how-can-I-be-helpful jabberwocky. It’s not surprising. Not because investors do not genuinely help, their value is just overblown, oversold, and over-promised.
Once in the bank, cash is indeed hard to differentiate. To stand out and get access to your companies, investors add the promise of future work to their checks. So, we promise. We tell you the stories.
And some added value is just that, stories. If you look at the investors crammed in a unicorn’s cap table, it’s impossible to believe that every institutional stockholder made a significant contribution to the founder’s journey.
If you study a VC firm portfolio, it’s even harder to imagine that a single human being has enough hours to reserve time to help every single logo featured on the website — by the way, a quick rule of thumb is to divide the number of portfolio companies by the numbers of partners. That’s a proxy of the attention you will be able to get.
While some of the VC pitch is hot air, in my experience, some investors do assist teams when fundraising, hiring, scaling sales, and steering a company to a massive outcome. However, even for the best investors, the commitment to help is hard to deliver consistently at various stages, industries, business models, and, technologies.
Thinking transactionally at what a future partner can bring to the table is useful but hard to predict. I find it useful to think about different levels of investment approach, irrespective of smarts, experience, brand, network, or size. I think it is more realistic to choose an investor for her belief system, not her future contribution.
Before worrying about the useful skills of the money wanting to get to your company, let’s start by asking: can their money hurt? Sadly, we’ve seen too many investors destroy value. Despite having a good pitch and even good intentions at the start, they invest in the wrong mindset.
Let’s get bad partners out of the way before talking about the good ones, shall we?
Turn down people investing carelessly who tend to manage their investment frivolously. For them, everything seems to be about optics and the shiny Techcrunch headline. These investors rarely ask tough questions and spend more time talking about themselves than your vision. They will sometimes be surprised and want to change things they themselves committed to on paper. Attention to detail is not their forte. When things go right, they will be the biggest fans. In bad times, they just disappear.
Be careful with those that invest anxiously. They are very concerned about the downside, the reputational risks, and their own internal politics. They overweight what-can-go-wrong over what-can-go-right. Due diligences are long and painful even for small checks. Term sheets and side letters are interminable. I’ve seen private equity, corporate investors, and DFIs invest this way. Unfortunately, too many VCs in emerging ecosystems still investlike this: fearfully. They will delay and block, even when their money is at risk.
Avoid at all costs, the worst possible backers, those that invest callously. Name-droppers and VC know-it-alls, they tend to follow whatever shines: brand, hype, and style. They are all about the big mark up, the quick cash. The worst of this crowd invest deceptively. They may turn against the founders the minute it is advantageous. These investors come in all shapes and sizes. If they’ve been around enough, you’ll find the red flags by asking around.
Now that you avoided that bad apple find a good partner. They do exist. I’ve seen them invest in three different ways, three levels of commitment that will serve your mission well.
Look for people that invest sincerely. They manage their portfolio professionally, believe in their role as partners, and will tell you the truth about their position. While this position may change, you always know where they stand. They ask the right questions and are direct about their track record. When you meet with them, these investors may feel more humble than the rest. The best family offices and most international VCs investing in emerging ecosystems invest this way.
Federate the actors that invest purposely. When you pitch to these investors, they seem to have been waiting for you. They know about the problem, understand the risks, and love the upside. Maybe they’ve done it before somewhere else. They believe in a mission they understand well. Great source of information and reality checks, VCs focusing on a particular vertical such as fintech or Saas fall in this category.
Finally, find yourself a partner that invests devotedly. Those that truly make a difference. These folks feel part of the founding team because they believe in you. Your success is their success not only for financial returns. Your failure hurts bad. Always on call, they work the hardest. These investors are all in. Never take these backers for granted for they are rare.
Nothing reveals people’s investing philosophy as a crisis, be it a global crisis or a life and death episode for your startup. Our pandemic times have reminded us all of the importance of choosing the right partners for your journey.
Before you let the investors in, make sure that they invest suitably and that you understand their investment approach. Ask around. Trust your gut. Please, don’t be fooled by bells and whistles. The thrill of the name on your press release will evaporate more quickly than the money in the bank.
A sunny afternoon on campus last February, Mafalda asked about the skills of my money: can your money code? I laughed nervously. This Portuguese MBA student disarmed me with a big smile almost reaching her round tortoiseshell eyeglasses. Out here, I do the cold calling not you, I thought. Unfortunately, for lack of a proper response to the technical competence of my small angel check, my money was not hired to help the promising fintech startup.
Until money can code, I’ll stick to investing passionately.