It’s no mystery: Creating a successful startup is difficult. Finding a great startup investment opportunity as a venture capitalist is not much easier. You can toil away for months before realizing that your investment is not going to provide great returns or may even incur a significant loss. In the fast-paced world of technology, a myriad of obstacles can confront even the most veteran investor.
I attained a diverse array of insights into these very issues during my time at a number of different VCs. These firms ranged from early-stage companies based in Tokyo to world-renowned VCs such as Index Ventures. Although I only began my work in the VC sector recently, I have managed to learn a great deal due to both the advice of excellent mentors and the time I spent sourcing companies.
Here are some of the most important takeaways:
When it comes to becoming a great venture capitalist there is perhaps nothing more important than building a great network. It certainly takes some time to meet the right people and to create lasting relationships but the sooner you begin this process the more time you will have to further hone your networking skills.
A strong network can suggest new startups for you to analyze or may even introduce you to entrepreneurs who are working on an extraordinary project. These individuals can also provide you with meaningful feedback and new perspectives on the companies you have sourced.
There is not one surefire way to attain a powerful network. Each person you meet will be very different from another and the relationship you form with various connections will certainly evolve over time. Some individuals prefer to meet others in informal settings, whereas others will only seek to create new connections in formal events and still others have a predilection for a combination of the two.
However, it is not enough to simply meet new people and to create a long list of e-mail contacts on an excel spreadsheet (trust me, I've been there). To ensure that your network will help you along the way you must stay in touch and reciprocate the help you receive. For instance, suppose that you learn about an enterprise tech company that is performing quite well. However, your firm is focused on mainly the consumer space. Why not send along the enterprise tech company's pitch to someone in your network who is interested in that space? This will increase the likelihood of the person reciprocating the help by perhaps introducing you to an amazing consumer-focused company in the near future!
Just remember that very few people will go out of their way to help you if you never provide any help or advice in return.
The tech sector is rapidly changing with new startups being formed at one of the fastest rates in history. Making sense of every single trend and niche is not only extremely difficult but also unnecessary, especially for someone who has just entered the VC world. So here is a great tip for you: don't try to do it all.
Time is the most vital aspect in any form of learning. If you attempt to focus on all aspects of technology, it is highly unlikely that you will come away with a solid foundation. A much better approach is to specialize early on when sourcing companies.
This specialization can be based on a broad industry or a specific category within a larger field. It is completely fine if you do not know what you want to focus on at the moment. However, you can begin to develop a focus by figuring out what excites you in the world of technology. Is it artificial intelligence? Social Media? Self-driving cars? Virtual Reality?
Once you have determined your interest, you can begin to devote your time to that sector. It is okay to change your focus over time, but having a specialty early on will allow you to build domain expertise. Learn everything that you can about your interest: trends, big players in the space, rising startups, etc. Make use of not only traditional sources such as books or blogs to develop your knowledge but also hackathons, your network or startup competitions.
After you have built this knowledge, you will be surprised to find that the sourcing process has become much easier compared to before since now you can better analyze what constitutes a company likely to fail versus a promising company in the field.
Beginning to think from the perspective of an investor can be quite difficult at first, but it is absolutely integral that you do so. A great way to begin doing this is to ask questions in your daily life.
Start by observing the world from the lens of an investor. Let's say you are interested in the AI sector. Think about problems you or others you know are constantly facing. How can AI help fix those problems? Is there a startup out there that is working to rectify these very issues?
In any traditional class on entrepreneurship, one of the first concepts you learn about the importance of finding a problem before developing a business. If you are creating a startup that is not helping to solve a problem, why bother creating it at all? Venture capital may be different from a startup but this concept is arguably just as important for VCs. If you can begin to recognize problems and how certain startups are helping to fix them, you can start to source startups that customers will actually want to use.
You are likely to come across thousands of startups during your time in the VC industry. Many companies will appear to be phenomenal investment opportunities; however, you must learn how to critically analyze the startups that you source.
A number of companies seem very promising at first glance. Perhaps the startup has enjoyed a great growth trajectory in recent months or maybe the startup team is entirely composed of ex-Google engineers and product managers. However, the one true metric that matters for VCs is the return that a particular investment will bring to the firm in the future. So while that one startup you found may be growing at a rapid pace, a deeper look may reveal trends that indicate that this growth is largely transient in nature.
It is best to use a multifaceted approach when determining which company ultimately receives funding. Begin by looking at recent trends, customer reviews, opinions of those in your network and of course financial metrics. If the results are positive, then great! Now move on to projecting these results forward for the next few months or years. Will the startup continue to retain this strong growth trajectory and customer satisfaction rate? Are new and better competitors likely to arise? Is the business sticky or will customers be leaving in droves going forward?
Remember, your primary responsibility as a venture capitalist is to maximize potential returns for your firm. In order to succeed in this mission, you must develop a highly critical lens when sourcing companies.
The technology world is changing at a rapid pace, which often brings high levels of uncertainty. However, there is at least one clear certainty even in this largely uncertain world: the vast majority of the companies you source will never receive any funding from your firm.
You may find a startup that you believe is surely going to become the next Facebook. You begin to daydream about how you will spend your millions after this company goes public in a few years. You make plans to buy a luxury yacht or maybe even a couple of them. However, you learn a few weeks later that customer growth for the company has completely stagnated and that the startup's team is highly inexperienced. Quickly, your daydream dissipates into nothingness as you come to the realization that this startup will most likely be defunct in the next few months.
You must understand that most companies you source will not be as great as you first thought they would be. However, you cannot let this mere fact discourage you. Venture capitalists help fund the next generation of innovation and this process is by no means simple. Part of the job is to find that one great startup in the pile of mediocre companies.
Over time you will become better at both finding these great companies and at recognizing key patterns that constitute amazing opportunities, but early on this will not happen for anyone. As long as you continue to be curious about the technology world around you and remain confident, you will be just fine.
Mirza is the Co-Founder and CEO of ChainView Capital, an investment firm focused on crypto assets. Previously, he was an investor at Two Sigma, one of the largest hedge funds in the world. In addition, he has worked at Citigroup, BCG and Index Ventures. In his free time, he loves to travel and also remains heavily involved with a number of nonprofits both here in the US and abroad. Mirza studied Government at Harvard University.