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The Personality of your VC Matters, Ask Investors their MBTI

Insights / Research, Startups, , , , , ,

It would seem I struck a bit of a chord the other day, pushing the popular Myers-Briggs personality assessments well beyond the overdone “What’s the best Myers-Briggs Personality of Entrepreneurs?” to instead share what personalities make the best startup advisors. Begging then the question of whether or not personalities correlate with quality startup investors.

A good venture capitalist (VC) must blend curiosity, resilience, and decisiveness with strong interpersonal skills and unwavering integrity. They need a deep understanding of financial concepts, industry knowledge, risk management, and strategic thinking, alongside strong analytical and negotiation abilities. Most successful VCs have backgrounds in entrepreneurship, investment banking, or technology, often supported by advanced degrees and a robust professional network. Raising capital and building a proven track record are essential for those starting their own VC funds. The role is challenging, requiring constant learning and adaptation, but it is crucial for navigating the high-risk, high-reward world of startup investing.

I put in bold a couple of considerations there to draw your attention the fact that those aren’t personality traits but rather experiences that, arguably, distinguish a startup investor from a business or retail investor.

This is overwhelmingly critical to your ecosystem because the expectations we can and should have of VCs are drastically different from people of wealth, investors in real estate, or people who invest in companies. Hence the question here, can Myers-Briggs help us identify is someone is more likely a “good” VC? It would seem so:

Retail Investor? What’s that?

Retail investors are non-professional investors who generally invest smaller amounts in stocks and bonds. The retail investment market includes retirement accounts, personal real estate, brokerage firms, online trading, and wall street investments.

1. ENTJ (The Commander)

Natural leaders, strategic thinkers, and excellent at planning, ENTJs are assertive, confident, and comfortable making tough decisions, which are crucial qualities for a VC. John Doerr comes to mind, a prominent venture capitalist at Kleiner Perkins, is often cited as having an ENTJ personality, because the role requires guiding startups and making investment decisions.

2. INTJ (The Architect)

INTJs are strategic, analytical, and visionary, exceling at long-term planning and often seeing patterns and trends that others might miss, invaluable in the rapidly changing world of startups. Peter Thiel, co-founder of PayPal and early investor in Facebook, strikes me as the traits associated with the INTJ type, explaining why he seems to make informed investment decisions that foresee the potential of a startup or sector of the economy.

3. ENTP (The Debater)

This is me, and to be transparent in saying that, as most know, I’m not a VC (but I love to advise). Innovative thinking and strong networks are immeasurably valuable in startup investors because a VC needs to think outside the box, draw from others’ experiences, and keep tabs on a sector, most effectively accomplished by talking to people. ENTPs are innovative, curious, and enjoy exploring new ideas. They are excellent at nurturing communities and persuading others, which are key skills for sourcing deals and supporting portfolio companies. Someone who comes to mind in this case is the co-founder of Andreessen Horowitz, Marc Andreessen, who seems to me to be an ENTP. Natural curiosity and the ability to challenge the status quo make an investor adept at identifying disruptive startups and guiding them through early growth.

4. ESTP (The Entrepreneur)

Literally distinguished by Myers-Briggs as “The Entrepreneur” personality, ESTPs are dynamic, energetic, and thrive in fast-paced environments. They are excellent at seizing opportunities and can make quick decisions. Who comes to mind? Mark Cuban, entrepreneur and investor, is often associated with ESTP traits, known for his high energy and quick decision-making skills, he exemplifies that among the greatest startup investors are the people who themselves have been there and done that. ESTPs’ ability to thrive under pressure and make rapid decisions are particularly beneficial in startups and the pace at which effective startup investors need to work.

5. INFJ (The Advocate)

INFJs are insightful, principled, and driven by a sense of purpose, often having a strong vision for the future and providing deep support and mentorship to the startups they invest in. Indeed, INFJs also make great advisors. The founder of Lowercase Capital, Chris Sacca, is sometimes described as having INFJ traits, known for his vision and advocacy for entrepreneurs. Their ability to connect deeply with founders and a vision can lead to strong, supportive relationships and insightful guidance for startups source.

Take all of this with a grain of salt because I’m using these VCs as examples, drawn from my estimation of them more so as a technique to help you identify the investors in your community who share (or lack) these traits. I’ve not spoken with any of them about this and my haphazard assessment may not be who they really are.

Notice from my assessment of ideal advisors, they’re not the same: ENTP, INTJ, ENTJ, INFJ, INTP. Alright well, they’re damn close to the same. What difference have I drawn between ideal VCs and Advisors? INTP as an Advisor whereas ESTP can make a great investor – the ESTP is, frankly, likely too entrepreneurial to give a founder the focus they need whereas the INTP likely overthinks the deliberate risks that need to be taken to invest in startup. The rest are, arguably, similar personalities because again, what matters is most is that advising, investing in, or working in startups IS NOT THE SAME as supporting businesses. Evidenced by Oxford’s study of successful startup founders, people all but must have a need for variety and novelty, reduced modesty, an openness to adventure, and heightened energy levels. If that’s not you or isn’t on your team, you must seek advisors, investors, and cofounders who are.

Peer reviewed research has proven that certain personality types are more likely successful founders, so it lends itself to the fact that certain types of people are going to make capable startup investors. “Myers- Briggs Type Indicator Score Reliability Across: Studies a Meta-Analytic Reliability Generalization Study,” in Educational and Psychological Measurement finds that it is a credible framework for understanding individual differences in perception and decision-making, demonstrating that MBTI can effectively identify traits such as risk tolerance and supportiveness by categorizing individuals into distinct personality types, each with unique behavioral tendencies.

Why might this matter so?

In MediaTech Ventures‘ work developing startup ecosystems for cities, governments, and sectors of our economy, it’s evident that regions of the world defer first to local investors; after all, these are the people who show up at events and make themselves known as available investors.

Let me be bold: Should they?

Clearly, startup experience, risk tolerance, and certain personality traits matter but what happens in most startup communities is that those business and retail investors, perhaps real estate investors, step up (usually yes, with good intentions) to help the community. The rub in that is these investors have little experience and draw from a very different comfort with risk. As a result, and you might be able to see this in your city, you have a dearth of “Angel Investors” in part because those Angel Investors want to be known for stepping up and supporting while at the same time, they don’t know with whom to invest funds into a Fund more substantial (don’t know who, or who to trust). At the same time, in developing ecosystems, you probably have a small handful of larger funds, because they’ve been able to show some success (or they have privileged access to Limited Partners, the people who invest in Venture Capital Funds).

What results from this is called the Series A Gap.

Series A Funding Gap

Most cities have this. In transition from a nascent startup ecosystem to something more mature, a process that takes 7-20 years, most wealth participates in their singular capacity as Angel Investors because the sophistication isn’t yet developed so that most wealthy participants make the wiser decision of investing in startups *through* Funds. The relatively few funds that are established remain a bit risk averse because there remains a shortage of capital to deploy (and lose).

Series A startups are shifting from proof of concept to scale; they need to demonstrate significant progress and a clear path to scaling, which can be a challenging hurdle. Investors at this stage are looking for evidence of product-market fit and early traction. The highly selective funds need to seek the startups that seem to more capably show the potential for rapid growth. And it’s this selectiveness creates a bottleneck where many startups fail to secure the necessary capital to scale.

Angels remain angels, and besides, often lack the experience necessary to advise founders about how to scale. You hear this in frequent advice from investors to, “focus on customers and revenue” – such investors aren’t actually giving you good/actionable advice, they’re giving you advice that sounds good because they don’t know what else to advise.

Such investors should be allocating their funds to Funds, but that would remove their visible participation from the ecosystem; never mind the fact that it would result in better ROI and more meaningful investment, because the capital would be in the hands of people who know what they’re doing.

Hence this personality assessment of Startup Investors matters

While my assessment is by no means complete, hopefully it paints a picture of how and why you should AVOID the “startup investor” or “angel investor” who clearly has an emotional attachment to what you might be doing while they’re likely also to push you too hard to focus on revenue, or a stable business – particularly when they have no idea HOW you should do that.

These are the personalities showing up, and indeed likely *wanting* to help. What’s that saying? “The road to hell is paved with good intentions.” That might rarely be more evident than in startup investing, where a lot of people want to be involved and want to help, but if you, a founder, end up with investors who don’t know what they’re doing, or who lack the tolerance to stomach the turmoil of a startup, you’ll certainly be in hell despite those good intentions.

Founders, VCs Might Not Like My Sharing This, But They Should

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One of the more challenging skills to help develop in a founder, is being able to discern b.s. from experienced and valid advice. As you might imagine (and I hope you can relate from the all too prolific frequency with which this happens), it’s particularly difficult to know how to put questions back on a person from whom you’re seeking capital.

We live in a society in which we’re led to believe that the accumulation of wealth = success, or that the popularity of a brand or personality means they know what they’re doing; first and foremost, appreciate as a founder the idea that if anyone’s advice was “correct,” they’d be doing it, and you’d be out of the job.

How to Validate the Advice of a VC

Over the years, I’ve developed the habit of using 3H to discern if any advice is valid, and I want to share that with you because I’ve been increasingly asked how to deal with accelerators and investors that don’t seem to know what they’re talking about. At the root of the challenge of validating advice is the social norm of developing a good relationship with people; requiring, avoiding calling them out, avoiding making people feel like they’ve been caught with their pants down, and truly, being genuine in trying to work together.

I’m sure, or rather, hope, you’ve heard the advice about fundraising, “When in need of funding, ask for advice, and if you’re seeking advice, ask for funding.”

Inherent in that, recognize, that advice from investors is most likely valid advice about what is ideal for them. Drawing from their experience, their job, and the expectations of raising and managing funds, what they advise WHEN in the context of raising capital, is experienced advice. But that doesn’t mean it’s right, how it should sit with you is greater merit given the source. In my experience, the other most likely form of advice from an investor is advice given because they are trying to help you overcome something but it might be something with which they’re not familiar – they know something is amiss so they’re offering some advice that might help.

How then do you validate if advice given actually comes from a place of experience and know-how? That it’s valid? Rarely (largely, if you think about it), is advice from an investor based in experience with what you are trying to do.

The risk that creates for all of us is that when entrepreneurs take investor advice on the surface, it’s likely misleading, wrong, or at least, inexperienced.

Bobby Goodlatte, Managing Partner at Form Capital, shared this wonderful tweet that fueled my pen to paper, “A VC who gives no advice adds far more value than one who gives bad advice.”

When Advised (and really, this applies to all advice!)

3H: How, Help, How?

  1. Verify advice/recommendations by asking how to do it
  2. If they can explain how, ask for help
  3. If they ask how you did anything, it’s okay to have that friendly attitude that kind of doesn’t understand what they’re asking. Why they’re asking something they should know how to do. “I’m sorry, I don’t follow, the same way everyone would …”

VCs often network for good reasons. Might be nothing more than that; they’re trying to help.

They might genuinely be interested and wanting to help, to stay connected, but their advice isn’t that great.

They might be fishing for intel.

And let’s be realistic, you and I know, they might have terrible advice.

3H gives you confidence in dealing with any of those possibilities. Let’s explore each by going through them in some detail in reverse order:

Are they fishing?

You feign misunderstanding when they ask HOW YOU ACCOMPLISHED something because they might want to know how for a reason (competitor?). Instead of calling that out, which is awkward, you are completely in the moral right to imply and establish that you know better than the VC, by making it seem so and being confused why they would be asking such a thing of you. In fairness, they should know how to do things valuable to startups… so why are they asking?? Are they fishing? Do they really not know? Are they trying to prove for themselves that you know what you’re talking about?

“I’m sorry, how we did acquire those customers?” in response, for example, tends to cause a reaction that gives you insight to what the inquiry is trying to accomplish.

Help us

After all, you’re there to raise capital, or at least in other ways secure some resources to help you be successful, so when advice is capably followed up with HOW TO do what is being advised, ask for help!

When they can and do tell you HOW to do something, they’re the one with the funds and they obviously have the know-how so in recommending a valid possibility; if truly wanting to help, they can, somehow: recommend a hire, refer to an advisor, or why not even ask for less capital, to do what they’re telling you will work.

How do we do that?

“That’s great advice and of course we’d love to get that done but that’s not my skillset, how do I start and make that work?”

Why ask that besides the obvious reason that you need to know?

They very well may not have a clue. Their advice might be crap, it often is. Having the check dangling, having acquired the funds, or in other ways being successful, absolutely DOES NOT mean that their advice is in fact valid. Don’t let advice sit there for you to then have to figure out how, with what resources, and worse, determine if all that effort is worthwhile, ASK THEM HOW TO DO IT.

If they can’t explain how to do what they’re advising, is the advice that you do something really based in experience?

The 3H – How? If good, Help. And, why are they asking *us* How??

Really rather simply, always remember HOW and ask how-to of every recommendation you receive.

A favorite example to explore together: Too often, Angel Investors and VCs will give the bad and unhelpful advice of “focusing on customers,” and if you’ve had that experience, you know, they’ll usually leave it at that alone, because of course, it sounds right.

But, hol up. As a startup, we don’t have customers; certainly, not many we can talk to…

“Great advice! How do we get more so we can do that?”

If they can’t explain how to get customers for what you’re doing, how valid is advice that such customers are the right focus? When it’s not even clear who the customers are, where to find them, that they’ll agree there is a problem/opportunity, and how to start that conversation… why would focusing on customers be good advice??

Yes, I said it’s often bad and unhelpful advice to focus on customers because you’re not an idiot, you have experience in your industry (I hope), and it’s well known that having an experienced team and understanding the market and competitors, informs best what a solution should be. Anything that meaningfully creates value can be monetized, and “The customers is NOT always right!”

If and when they can indeed explain HOW to get more customers and accomplish what is being advised, it puts the conversation back in that loop of why you’re seeking advice — getting help … such as, asking for some money if they are certain that that focus on customers is good advice.

–

I’m going to continue to provocate, flip conventional wisdom on its head, and focus on flaws in the startup ecosystem (and what you’re doing) more than merely rehashing that things are great. When we know most founders will fail, I find it helpful to explore more of what will help us all avert failure. If that’s meaningful for you, do join us at mediatech.ventures

How Funding Startups is Like Betting on Horses

Industry, Insights / Research, Startups, , , , , ,

Last week, a bit of a controversial, but thought-provoking, perspective about Venture Capital caught the attention of a lot of my readers and followers.

There has been a horrific rash of *VC Bad* propaganda and misinformation lately, sparking my thought that people are being misled about the what Venture Capital is and does. That, entrepreneurs are frustrated because VC isn’t meeting *their* expectations, when what’s actually happening is that people have expectations of VC that are misplaced.

True or not, is the role of venture capital clear? Does a lack of clarity fuel frustration and misalignment of advice and expectations? Are people in disagreement about all this??

A comment on the article somewhat affirmed my hypothesis:

“My own feeling is that VC is too much like flipping houses. In many, if not most cases the entrepreneur and the angels are not interested in building anything, they are just interested in flipping and leaving the final investor with a flawed, leaderless business.”

As I spent the weekend sleeping over this idea, some notable VCs joined me in a discussion asking this question, affirming that indeed, people misunderstand the role of Venture Capital…

Is funding startups kind of like betting on horses? In the sense you bet on a lot of losers, for that one big win?

Is funding startups kind of like betting on horses?? This isn’t well known?? People are hoping to invest in startups as though there is a winner of a race?! Venture Capital is NOT like betting on horses; in horses, there is always a winner.

Venture Capital investing is not even like gambling in a casino, at least the odds there are better than 10%.

“Venture Capital Destroys Value” – What??

People have this exuberance for being a startup investor biased by headlines of wealth and the public perception of being an “Angel” or “VC.”

Here’s the dirty reality…

Startups are for the high risk takers. Startups are for people willing and able to try ONLY because they want to make a difference. There is no higher financial risk endeavor than startups. You could literally do anything else and be better off.

Startups are NOT new businesses. There’s that saying, something along the lines of “business owners work their butt off today so they can take it easier in the future.” (Something like that). That applies to new businesses – not startups!

When a business model is known, you should absolutely consider starting or investing in said “business.” A known model means you should be able to make money and succeed.

That’s not what “startups” are.

Startups do NOT know the model. They’re the R&D of the economy. They try and try and try to do completely new things, and overwhelmingly mostly fail.

That’s normal. That can’t change and isn’t wrong. That’s what startups are: try the stuff that won’t likely work so as to uncover the new stuff that might.

MAYBE think of startups more like medical research in new drugs. It will cost a lot. Some things will harm people along the way. With enough attempts, time, and effort, we might find a cure for cancer.

Is that worth it? Absolutely YES. To some. Most shouldn’t even consider taking the risk because it’s not about financial gain, it’s about the achievement. And on the path to that achievement is difficulty that most can’t manage or afford.

How is funding startups like betting on horses? Imagine running every kind of horse, donkey, and giraffe you can find, not though Churchill Downs but a dirt bike track, betting on all of them, and hoping one crosses the finish line.

“Venture Capital Destroys Value” – What??

Industry, Startups, , , , , , ,

The conversation recently had started, “Why do venture capitalists invest in startups if many of them are losing money and destroying value?” and I had to pause when I heard the point of view because I couldn’t even rationalize how someone thinks that way. Then of course it dawned on me that lately there has been a horrific rash of *VC Bad* propaganda and misinformation; truly, take a look:

Before you misunderstand me, read those articles because there is a tremendous wealth of knowledge and perspective in them, about what Venture Capital really is and the role that it plays. My point, is that in our era of twitter headlines, people are reading those kinds of headlines alone, frustrated that they can’t raise capital (often unwittingly for valid reasons), and are demanding that VC change; that it’s bad and not working.

With that point of view, I revisited the question and realized that it stems from a misunderstanding, start with just this, “Why do venture capitalists invest in startups if many of them are losing money?” Wait… do you think Venture Capitalists invest based on revenues in companies, or worse, profitability?? Who has been feeding you that line of bull?

Why do venture capitalists invest in startups if many of them are losing money and destroying value?

“Venture” Capitalist

As in adventure.

Venture is a noun: a risky or daring journey or undertaking.

Venture is also a verb, to venture: dare to do something or go somewhere that may be dangerous or unpleasant.

I share that because society has grossly misled what Venture Capitalist means, in our era of being polite and accepting any use of word for any purpose. Venture Capitalist is NOT a business investor. It doesn’t refer to a partner. It’s not an Angel Investor (that’s something distinctly different).

So, why do venture capitalists invest in startups if many of them are losing money and destroying value?

Because that’s the role of venture capital in our economy.

Not to fund businesses. Not to finance R&D. Venture capital doesn’t pour into pharmaceutical research nor is it there so you can start a restaurant.

There is a type of “venture” that is incredibly high risk but which results in most wealth creation and innovation: the startup.

Those articles shared are not warning about Venture Capital, they’re warnings about people who claim to be VCs or Angel investors, they’re warnings about what VC is really about and what it expects; their provocative headlines are meant to teach by exposing the causes for caution – not that VC is actually destroying the economy.

A startup is NOT a new business nor is a new business a startup. A startup is a temporary venture for which the business model is unknown and needs to be trialed, validated, tested, implemented, and optimized.

The model! Not the tech. Not the product.

A startup is a new venture in which the model is unknown.

This can be tech, fashion, CPG, or really in any sector. The key distinction of startup is NOT that it’s new nor that it’s tech, but that the model isn’t known.

You want to start a ridesharing app in your city? That would NOT be a startup; because the model for that is now known.

Venture Capital funds the startup, not the new app.

And since the model is unknown, it is known and accepted that there is an exceptionally high rate of misfires. Fails.

That’s the work.

If we’re going to uncover new models, they have to be attempted; and since we can’t just R&D our way into new models that work, they have to be tried, and mostly fail.

And those efforts require resources: human and capital.

Thus, an opportunity for investors.

Venture Capitalist refers to the person who manages a fund comprised of many capital sources, intended for startups.

An Angel is an individual focused on startups. An investor or business partner is what we’d call people investing in businesses.

So Venture Capitalists take risks investing in such high rate of fail ventures because…

Wait for it…

They’re paid to.

Wealthy people, trusts, foundations, and other funds, pool their capital into Venture Capital Funds, and the General Partners and Principals of those funds are PAID to operate them; they’re called Venture Capitalists.

And why does anyone bother? Why do it at all?

Because startups have the potential of delivering 20x returns. Those are unheard of returns in almost any other investment opportunity.

The cost of those returns? That 90% fail.

Simple math, overly simplistic, but why it works:

  • $1,000,000 invested in 9 startups
  • $100,000 went to pay the VCs
  • 9 startups got $100,000 each
  • 8 of those will fail. Gone. Poof.
  • 1 succeeds and on $100k in, kicks back $2,000,000 (20x)

Positive ROI. Yay! Everyone celebrates with a boisterous and over extended holiday party.

Now to be clear, my simple example is NOT how it literally works, I’ve just found it to be the basic way to explain it so it makes sense to people. Reality is much more complicated and the odds aren’t even as good as that implies.

But hopefully you get it.

Yes, you can just invest in businesses, and only 40% will fail. And you won’t get near a 20x possible return.

Too, by the way, you can bet in a casino, and even there, you can get to about a 51% rate of failing.

VC is worse, as a percentage of wins. It invests in ventures: startups, because it’s seeking the greater than normal returns, in order to overcome the losses.

“Why do venture capitalists invest in startups if many of them are losing money?” If you think Venture Capital is for operating businesses and profitable companies, you’ve been misled; seek a business investors for your work. If you’re taking great risk to invent an industry anew, if you don’t have customers but you have the very real potential to disrupt an industry and create wealth and jobs, the venture capitalist is your friend, and they’re doing precisely what they’re supposed to be doing.

—

Footnote:

“Destroying value” is a horrible misunderstood perspective on this.

None of that destroys value, it creates more value than just about anything.

Failed startups create value. They weed out the things that won’t work so others don’t try it. They train entrepreneurs to find success in the future. They develop IP that though startup might fail, a company or investor might use it again. They create acquisitions.

In failure we learn, more than in success.

The entire sector of our economy, comprised of Angels, entrepreneurs, and VCs, likely creates more value for the world than anything else humans do.

In the Company of Venture Capital

Startups, , , , ,

People have different definitions of “startup” and “venture capital,” and it’s that foundation that causes frustrations and misplaced expectations.

What Frustrations in Venture Capital?

I ran a quick query on my favorite Q&A site, Quora, and found a litany of similar questions:

The gist of the theme we’re seeing is that people are disappointed that VCs aren’t interested in their thing. And that’s spurring disdain toward, and misconceptions about, Venture Capital; aggravation that we might explore a bit more, to help alleviate and better direct everyone’s focus toward meaningful connections.

In MediaTech Ventures, our most popular article is Venture Capital Firm Investment in Entertainment Companies, reinforcing for me anyway, that people the world over are trying to figure out why investors aren’t engaging, and how to better raise capital.

And with all that in mind, it dawned, that to a very great extent, it isn’t that you need more customers, a better pitch, or some other evidence of a good business, it’s that we’re seeking funding from the wrong sources of capital.

Think of all the Capital in the World as Being Isolated in One Hypothetical Company

This is a thought exercise; a way to change our perceptions and expectations. So play along, imagine if our entire economy was ONE big company and that everything we do and everything we have exists within that company.

VC is a target in recent years. “Why won’t it fund my new business??” “It doesn’t like profitable, sustainable ventures, WTF??”

I’m paraphrasing of course; the point is that there is the ire toward certain forms of capital because it inexplicably doesn’t fund otherwise successful things. Fair? So here’s our notion: Think of that company, everything we all do has a correlation between With The Company vs. Otherwise Reality

The company

Consider (oversimplifying of course) that our company has money allocated to 4 distinct things:

  1. Operations: employees and licenses, supplies, etc. – the stuff needed to exist
  2. Growth and optimization: marketing, developers, promotions – the budgets allocated to become more
  3. Innovation and R&D: research and development, experiments, design, trials – the investment companies make in completely new things
  4. Mergers & Acquisitions: acquiring small businesses, legal expenses to merge – consider the expenses incurred when companies make major changes

Thought exercise. With me so far?

Your work, your venture, draws resources from one or more of those sources.

To appreciate the role of Venture Capital, we look at the purpose and expectations of capital sources for each of these cases as though it were reality and not our isolated company:

  1. Operating expenses and employees for our company funded akin to a Bank Loan. We know how the money is used, for what, and our operation drives measurable revenue – Money out / money in.
  2. Marketing and development budgets are *business investments.* We’re putting money into something, knowing what to expect but not directly driving revenue. We’re investing in the business. And while we use the word “investing,” this isn’t the same as Venture Capital investment because our allocations to development or marketing are typical, familiar, and with expected results. This is what you’d get from a business investor, partner, or in something like revenue based financing.
  3. Our company’s Research & Development is fueled by Venture Capital. We don’t know if it will work, we don’t have or know the model. We have to invest in a great many tests, experiments, and endeavors that will fail, if we’re to uncover that which might work. We’re funding possibilities.
  4. M&A (Mergers & Acquisitions) is Private Equity. Our company has cash on hand, equity, and other assets, and we can use that to do massive things with organizations.

Why doesn’t Venture Capital fund the profitable business? That’s not its role. That’s not its purpose.

Frustration or expectation is misplaced IF and WHEN we’re developing or operating a business that isn’t suited to Venture Capital. VC funds the experimentation of our economy.

I want to invite you to join me in such discussions live and together.

Join me online here

How VCs Make Money: the 2 and 20

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In downturns in the economy, it’s then that Venture Capital Funds really come to the forefront of our startup communities because it’s then that entrepreneurship shifts from a buyers market to a sellers market.

Buyers vs. Seller.

Some time ago, I got a little bit of s*** for suggesting that founders think of Venture Capitalists as customers. Lambasted a bit because noble, wealthy people really took some offense at being called customers, the fact is, the underlying notion has merit because Venture Capitalists are exchanging capital for a product of value (that being equity in your venture).

We can draw from a conventional wisdom of Real Estate an appreciation of how entrepreneurship goes through Buyers and Sellers Markets and thus, it’s the “Buyers Market” (in which we find ourselves now) that smart investors get involved.

“A buyer’s market occurs when the supply (available homes for sale) exceeds demand (the number of buyers seeking to purchase homes). If you’re buying a new home, a buyer’s market is the ideal time to make your move. You might be able to buy a great home for a lower cost than you would in a seller’s market.

A seller’s market occurs when demand exceeds supply, or there are more buyers seeking to purchase homes than there are available homes on the market. This often leads to multiple buyers interested in a single property, resulting in bidding wars.”

– Redfin chief economist, Daryl Fairweather

The “buyer” being a startup investor, a few things happen in a difficult economy:

  • More people endeavor on an idea, resulting in a greater supply
  • Costs in the market overall plummet, reducing the costs of starting and operating a venture
  • Founders and teams are psychologically attuned to being more flexible on terms and expectations

All of that equates to a “Buyers Market,” making this really a time when society can identify and uncover Venture Capital investors because a second bit of conventional wisdom, this from Wall Street, always holds true for anyone in finance: buy low and sell high.

Now is the time to seek capital and now is the time to develop meaningful relationships with Venture Capitalists because now is when venture capital wants to help.

And we need only look at some of the popular content in startup communities in the last few weeks to see that there are Venture Capital Funds really ready to get to work with you:

Don’t get me wrong! I’m not saying venture capital investing won’t slow and even dip; I want to encourage you think differently and that you use this time to appreciate HOW Venture Capital Firms work and that, as I’ve alluded, it’s now when you might really uncover WHO is important to you in the capital market.

A Fund is a fund and presuming you have a venture fundable, the circumstances of the economy wouldn’t change [much] the interest a fund has in what you’re doing.

Starting those conversations and considerations doesn’t actually start with your pitch, it starts with knowing how Venture Capital Funds operate and get paid; so that you can discern which firms are “in business” funding entrepreneurs.

Venture Capital Funds are Businesses

…and the Partners get paid

When raising venture capital this fact may be the most important thing for all entrepreneurs to know: How the VCs Make Money

Before you jump to the often advised conclusion that Venture Capital Funds seek exits or only big opportunities, appreciate first that Partners get paid.

Venture Capital Funds are businesses.

The typical structure is what’s referred to as 2 and 20 and knowing if/that/how/who operate as such, really changes the expectations both parties (you and them) have in exploring opportunities.

 2 and 20 refers to the business model that compensates VCs for running their funds

  • 2 – 2% of the capital in the fund is charged to the fund as an annual management fee. That fee is used to cover the cost of running the VC fund – salaries, rent, resources, and other overhead.
  • 20 – refers to a participation on profits: 20%. This is called carried interest (or often, just, “carry). After the investors in the fund get a return of their capital invested, under whatever terms are in place, then the VC(s) get 20% of any profits.

That’s a Venture Capital Fund’s business and what it means to you as a founder, is that you want to KNOW (and appreciate) IF a source of capital operates that way because the SIZE of the fund then establishes the kind of operating capital they have to work with, how much they could invest, and whether the fund is paying (employing) people that can help you (or not).

Let’s back up because that model can really be confusing and it’s rather transformative when you know how it works and why.

You might have noticed from time to time that I can be a bit of a stickler about what the word “Venture Capitalist” means and how that word is not the same as Angel Investor, Business Investor, etc. It’s always been my experience that Venture Capitalist refers to the Partners in such Funds.

Venture Capitalists raise money.

See, I told you knowing this might be transformative. Venture Capitalists raise the capital that they use to invest in startups.

Investors, in a sense, as such, are not “Venture Capitalists;” the investors are referred to as limited partners (“LPs”). Funds usually form as a limited partnership with the VC being the general partner (“GP”) managing the fund.

Why the Size of a Venture Fund Matters

Let’s say a “Venture Capital Firm” has a $100 million fund.

What that means is that the General Partner(s) have raised $100MM from investors and sources of capital, usually high net worth individuals (“accredited investors”), pension funds, foundations, and endowments. A 2% management fee is charged as a percentage capital meaning that each year, $2,000,000 is what the Fund/Firm has to work with to pay people, hire, and operate other resources

Note that there are technicalities, circumstances, and variations in which this isn’t exactly how it works and certainly not always how it works. For the sake of keeping it simple and upskilling everyone, let’s stick with the basics (should you be someone who knows this stuff better)

That fee is charged over the length of time General Partner(s) need the money to operate the business of managing the investments.

Meaning, say our $100MM fund invests into 10 companies over 10 years…

That’s $20MM (twenty million) that goes to just running the business. And $80MM in fact available for the investments. Thus, a glimpse into how much the Fund can actually invest in anything. Appreciating that any good startup investor is investing in at least 10 things (hoping to hit one good return), we’re looking at a firm that is likely little more or less than $8MM in any investment.

In time, the startups exit and let’s say the Firm ends up with $100MM PROFIT from the exits. As it comes back to the fund, over time, the LPs (the “investors”) get 100% of any cash until they get back whatever they have invested to date. Eventually, in our case, there is $100 million of profits to split. The General Partners get 20% of that, and the LPs get 80%.

Why this matter so much to understanding from where and how to raise capital?

That fund size matters.

The life of the fund (over what time frame they’ll invest), matters.

The investment thesis (in what and when/how) they invest, matters.

Their operating budget matters because a Venture Capital Firm is a business that should have resources available to help you!

A $10MM Fund under the same circumstances, would only have an operating budget of about $200k per year. That’s essentially just paying one person. And for 10 investments, we’re talking about $900k. Such a fund is genuinely a seed stage fund, more of an Angel Investor, and certainly not something you’d want to think of as the same as a Venture Capital Firm as in First Round Capital.

A $300MM Fund under the same circumstances is understandably structured as a business to be more involved in all that you do and to capably fund later rounds and/or follow previous rounds of funding. We’re working with an operating budget of $6MM a year in this case; that means Executives, EIRs, and other resources, such as their own PR firm, which you could (should) expect are part of the value of what they’re bringing to the table.

These questions and structures matter. Venture Capitalist is a JOB and a job means you can have expectations of the people doing that work; raising capital isn’t just a matter of you pitching, they’re raising capital too, let me know if I can help.

What Startup Founders Might Consider Before Seeking VC

Startups, , ,

Venture Capital seeks opportunity, not a sales pitch. The mindset to have is that you don’t want to have to seek VC, you want investors to seek you. Of course, that doesn’t mean you won’t have to do the work and start the conversation; it’s a mindset – what are you doing to build the kind of company they’ll want and find?

Some popular discussion sparked a checklist to consider…

  • Two notions are complete nonsense
    1. You have to have revenue. No, you don’t. Read that perspective. Seek out advisors who understand how that isn’t the case if all you’re hearing is that it is.
    2. You have to be a unicorn. Society’s fixation with unicorns is fascinating to watch. Venture Capitalists aren’t looking for the next billion dollar company; but they are seeking work that can achieve far greater value than the capital they invest.
  • What isn’t nonsense?
    1. You must be capable of and willing to deliver a return on their investment. Venture Capital is not a loan and it’s not a business partnership; if that’s what you want, seek those sources of capital. Venture Capital is investment in innovative ventures that are more likely to deliver out-sized exits. If you aren’t willing to exit, or capable of doing so, don’t bother.
    2. All capital comes at a cost!
      • Customers aren’t “better,” startups fail all the time that have customers and the cost of being wrong is expensive
      • Convertible notes aren’t “better,” the terms and obligations *can* be a problem
      • Bootstrapping isn’t “better,” it is a burden to do it yourself and you’d hate to lose to competitors better capitalized
      • Venture Capital isn’t better either! VCs take ownership and rightly expect to have a voice
    3. Venture Capitalists generally alleviate their risk by focusing on your team.
      • Get to know them. I’m much more inclined to invest in you, knowing you, than I am because you have solid business metrics
      • You alone are NOT capable of being successful and competing; no matter how confident and capable you are. Have you filled your gaps and built a team that is?
    4. Traction != Customers. That’s some annoying advice right there.
      • Do you have co-founders?
      • Do you have Advisors?
      • Do you have Letters of Intent?
      • Have you surveyed hundreds of people?
      • Can you show me consistent traffic growth?
    5. “Startup” means a venture in search of a business model. Meaning…
      • You will fail along the way, it’s expected
      • Your numbers will be wrong, it’s presumed
      • You will pivot; you’d better
      • You should not have to prove anything through customers. When you create value, customers will manifest. Peter Drucker, “businesses exist for only one reason: “to create a customer.” How? Here’s how.
      • “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”