In a few days I will reach a rather significant milestone: 10 years as a VC. During my recent vacation, I always find vacations good periods for introspection, I started thinking about the lessons I’ve learned during this period. I entered the field after selling my last company in May 2000. The intervening years were marked by two recessions, including the recent severe one, and anemic venture returns. Some of my friends questioned the wisdom of remaining a VC under the conditions we’ve been experiencing, particularly since I had several opportunities to return to an executive operating role. However, every day I continue to be as excited about working with entrepreneurs and helping them build successful companies as I was the first day I joined Apax Partners, my first venture firm. I thought about writing my lessons into a series of blog posts in the hope that entrepreneurs will be able to better understand some of the influences that impact pertinent investment decisions.
I have organized these lessons around three areas: training how to become a good investor (covered in today’s post), investing in the right companies, managing the investments in order to make them successful. I will cover the other two areas in subsequent posts.
1. It takes awhile to develop a good investment sense. I will say that it took me at least 6 years before I could feel “sure-footed” about leading investments and being able to convincingly articulate an investment case to my partners. While people talk about venture capital being an industry, I liken it more to an artisan guild. Very much like an artisan needs to join a guild in order to apprentice with a master craftsman and learn his craft, a novice venture investor needs to apprentice with more experienced investor(s), who of course must be willing to teach their craft. Unfortunately, you can’t read a book or take a course and become ready to invest. For this reason it is important to find a venture firm with a strong and experienced partnership which is interested in transferring its craft to a novice investor. Looking for such a firm first in 2000 and later in 2005 after leaving Apax, I came to realize that not all partnerships, regardless of their investment records, are able or willing to teach their craft.
2. Join the strongest firm you can. The right firm will “launch” you faster because from the beginning you will have access to strong deal flow. Having strong deal flow from the beginning is important since it takes awhile to develop your own deal flow. I’ve had that benefit both at Apax and now at Trident.
3. Being a good executive (including CEO) doesn’t automatically make you a strong investor. Complementary skills need to be developed. Executives are very good at running a particular business, understanding and adjusting business models, sales models, etc. They only focus on one business at a time. Investors, on the other hand, first must be able to deal with multiple companies (their portfolio) at a time. In addition, they must be able to model a business in a sufficient enough manner so that they can decide the investment terms they will offer. These terms must be able to maximize the upside and protect against the downside. They will also need to be effective in the presence of the terms from prior investment rounds. So, it can get quite complicated.
4. It’s about how technology and business model innovation can lead to great returns. The investors that provide the capital to the venture firms, i.e., the Limited Partners, are not interested in whether a particular technology or business model are superior to others. They are solely interested in maximizing the returns of their investments in the venture funds with which they work. So, saying that you invested in companies with revolutionary technologies without showing profitable exits won’t mean anything.
5. Take your time to learn your craft. Fight the strong desire to invest from the first day. Learn as much as possible from your firm’s existing investments before you start making your own investments. You will find plenty of opportunities for improving the decisions of others, before you start making your own investment mistakes. For this seek to be exposed to portfolio companies that are successful, as well as to ones that aren’t.
6. When you are ready to build your own deal flow start by looking at companies in your area of expertise. In this way, you will be able to establish credibility with entrepreneurs faster and offer them significant value, which they always appreciate. Moreover, since you understand the area, e.g., software, internet, etc, it is more likely that you will be able to easier understand the issues surrounding the investments.
7. Develop the right networks because they matter once you’re ready to start investing. You need to develop three different networks: investors, entrepreneurs and executives. From the first network you will identify the individuals and firms with whom you will co-invest and who will show and share deals with you. The entrepreneurs in your network will be the ones that will bring you their ideas and companies to invest in. Finally, from your network of executives you will staff the management teams of your investments and identify independent board members for your companies. Even if you have great networks to start with, you must never stop networking.
In the next post we will talk about lessons relating to investments in the right companies.