Getting To Know Your VC (Better)

As an entrepreneur, getting to know your Venture Capitalist is essential, mainly because their life is not as cushy as you may think.

Just imagine the onslaught of business plans they get, and how much time it takes to find that worthwhile investment. Eliminating the false positives and false negatives take time, lots of it. We reviewed about 40 companies over the last seven months, yielding three companies that have tremendous potential for our investors but they need work. Hard, fun work. But the life of the VC doesn’t end there. Knowing the goals of your VC (regarding fund composition and exit requirements) will make you better understand why a VC firm behaves the way it does. Its fund needs to end up in the top quartile, with or without you.

Operating on both sides of the innovation marketplace and getting to know the investors I work with better, I attended the AAMA-AAAIM session in San Francisco called “Fund Management As A Business” moderated by the skilled and jovial Robert Grady, Managing Director of The Carlyle Group with a fantastic group of fund managers (Hamilton Lane, SFERS) and a surprisingly honest VC (Altos Ventures). I wish everyone in the investment community were as transparent as this group so we can remove some of the stigmas of VC.

Here are three reasons why VCs don’t have it that easy:

  1. Many more VCs need to compete aggressively on a relatively steady amount of fundable deals, hovering around 4,000 equity investments in venture-backed companies per year. The number of VC firms has grown from 399 in 1990 with $31B under management, to 798 firms in 2006 driving $236B into the US venture marketplace.
  2. Joe Schoendorf (Partner at Accel Partners and board member of World Economic Forum) confirms that less than 5% of the VCs deliver the goods that sustain technology as an investable asset class. That means 95% of the investors are probably stressed out. So don’t take a lack of response or a no from a VC too personal. VCs deal with complicated and sometimes long drawn investment strategies (it took Altos Ventures 3 years to land their last fund). Investment allocations may be another reason why you don’t always get a quick response for your technology venture.
  3. VCs are working hard. The exits of about 400 M&A plus IPO transactions per year account for less than 10% of total venture investments made. And to get a successful exit, VCs review more than 20 times (and that’s a conservative assessment) the number of business plans before they invest in one. So, south of 0.5% is where their – and your – statistical probability of producing a successful exit lies.

The same criteria that apply to the return of the common technology investments made by a VC with a fund apply to their Limited Partners (LPs) trying to find great collective VC returns for their Investors (Pension Funds, Insurance Companies, Endowments/Foundations, etc.). The VC is sandwiched smack in the middle between the entrepreneur and LPs breathing down their neck. Their only “luxury” is time: 5 years of investing and five years of harvesting.

As an entrepreneur you can’t worry too much about the statistics, if you did, you wouldn’t be an entrepreneur. But the number of deals is slightly on the rise again, perhaps indirectly spurred by a massive influx of sovereign funds, means access to money – to live out your dream is improving slightly.

But be prepared to talk to more VCs and saddle up for an extensive roadshow. The fact remains: the cost of doing business to entrepreneurs and investors – to produce returns – has increased dramatically.

Let’s lead the world by example with new rigors of excellence we first and successfully apply to ourselves.

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