Getting into the Mind of a Venture Capitalist
This blog is a response to Opeyemi Awoyemi's piece on TechCabal.
Opeyemi brilliantly articulated how an entrepreneur should approach Venture Capitalists (VC) and their hot monies, but there were some assumptions he made that I did not agree with. I provide this article so that entrepreneurs can have a glimpse into the mindset of a VC, and I think I should know, being an Angel Investor myself.
First off, I'd like to disabuse the mind of entrepreneurs. While it is true that an impressive resume, such as an MBA from Harvard Business School, may give you a leg up, it is not a silver bullet that will prise open the tight fists of an average VC. While it is also true that recruiters will chose a Harvard MBA over a smarter OAU graduate, they will also exhibit the same bias by choosing a smart OAU graduate over an even smarter Iree Polytechnic graduate. Meanwhile, a VC will look at your business idea holistically. The only advantage a Harvard MBA has is that they have been taught how VCs process and sift through investment opportunities and probably how to outsmart the VCs. But there is nothing that have been taught that you cannot learn if you put your mind into it. At the end of the day, an Iree Polytechnic graduate may end up with an idea that a VC likes over that of a Harvard MBA grad.
Now, we will address the big elephant in the room. Do VCs really exhibit strategic laziness in making their investments? Maybe some do, but most certainly don't. There are four reasons why I don't agree that VCs are strategically lazy.
When VCs set up their funds, they have a strategy in place. If you don't fit into their strategy, your ideas will not fly even if you pulled it right out of heaven. They may go back and forth with you in a bid to see if there is a way your idea may fit with their over all plans. They may reject your idea after several iterations, only for you to feel they might have wasted your time. Perhaps, it is your idea that wasted their time not the other way round. If a VC is not interested in you, they will not waste their time going back and forth and seeking for more information.
Lesson number one. Be sure that you have a strategic fit with the VC you are approaching. If you are seeking $1 million from a billion dollar VC fund, you are wasting your time. If you are a tech entrepreneur seeking fund from a finance oriented VC fund, you are also wasting your time. Research the VC really well before approaching them for funding. Even if the VC approaches you, make sure you are on the same wavelength before you open your door to them.
Know Your Business
Many entrepreneurs approach a VC without a clear cut plan in place. A VC would like to know everything about your plan from the beginning to the end. How much of your business do you want to sell? What are the exit strategies? What are the risks facing your business and how do you intend to counter them? A lot of VCs are funded by other investors and creditors and they do not have unlimited time and resources. So you need to help them to help you. They don't want to hear stories, and it is your job to develop your plan and strategy, not theirs.
Lesson number two. If someone wakes you up from a deep slumber and you cannot tell them how demographic changes can affect your business, a camel is likely to pass through the eye of a needle before you get a cent from any VC.
If you don't love it, don't do it
If the real reason you set up the business is to attract a VC fund in order to cash out so you can become the next Zuckerberg, most VCs will smell you from a 100 miles away. They will string you along and dump you in the nearest canal before you take a whiff at their wallets. When you bring passion to your business, and this idea is something that you really enjoy doing, it will show. You may have the next big idea that will generate 50x returns on paper, but if the passion is not there, that deal is not going to happen. Be authentic. Be true to yourself. Be original. Don't copy Uber and sell it to a VC as your idea made for Nigeria. A serious VC will not take you serious.
Lesson number three. Be authentic.
The World is not a Fair Place
A VC would rather err on the side of caution than take undue risks. You might check all the right boxes, do all the right things stated above and a VC may still end up rejecting you. VCs are prone to Type II error - a lot of VCs mix up wheat with the chaff and throw both away - because they are human, not necessarily because they are strategically lazy. They want to give you money because they want to make money but at the same time, they don't want to lose money and that fear may cause them to overlook what they are supposed to see. Everybody loses at the end, but that is life.
Lesson number four. It is statistically easier to get into Harvard Business School than to get funding from a VC.
Before I end this, let me quote from the reference link above:
Pressure of multiple returns
Jason has talked about this – a 3x return is not a good one for a good VC, except we are talking late stage $100M+ investments. You know what is sexy? 20 – 50x returns.
So the key question for VCs is How big can this startup get? How fast can you get to a $100m-for-real valuation?
This statement is like placing all VCs into a tight pigeon hole. This is what an article in The Guardian addressed. There are many VCs that have woken up to the idea of social impact. Social enterprises hardly ever generate those sexy returns quoted above. Organizations such as NESST and Impetus don't give a hoot about your sexy returns if you don't fit with their ideas for social enterprise. At the end, a 2x return may be what a VC might just be looking for.
To end this, Opeyemi's last words on his piece are the words I would love to use to end this article because I couldn't agree more.
Except you are in the business of fundraising, I suggest you face your work – hacking/growing your business to traction – whichever metrics matter (revenue, users or transactions). To get funded by most of the VCs you’ve seen around – local/foreign (I’m not mentioning names), you actually need to be the bride that everyone wants to be with.