The different mindset between Venture Investor and Entrepreneurs
Many VCs are former entrepreneurs. Some entrepreneurs used to do venture investment or will become VCs after successful exits. There are many similarities between venture investors and entrepreneurs, like great vision, passion, entrepreneurial, and etc. But there are also many differences between those people sitting on the two different sides of the table.
Let’s start with Venture Investors. At the end of day, VCs are evaluated by IRR. So, they need 10x return, 100x return, they need home run! They need one investment that can bring return for the whole fund. For a typical early stage VC, he (she) reviews over 1000 decks in a year and only makes a few investments. Everyday VCs think about the following things:
· Market and customer: what is the recent trend in consumer and enterprise? What is the development in frontier technology? Is this potential market large enough for a unicorn? If this market is truly attractive, has anyone tried to build a company before? If not, why? What was the obstacle? VCs bet on future unicorns or even moonshot. If the market is not sexy enough, they will pass.
· Team: Does this company have a well-rounded team? How long have they known each other? Have they built anything before? Do they have the right experience to build this company? At the end of day, startup is all about people executing ideas. Investing startup is essentially investing in the best people
· Competition landscape: Is there any incumbent that dominate the market? Is this market fragmented? How hard to disrupt the existing players and ecosystems? Competition is a good indicator of the market but we don’t want too much competition.
· Product and technologies: Does this product have a strong value proposition? Are customers willing to pay for it? Does the technology have strong entry barrier? Can other players easily copy it? VCs like strong technology and strong value proposition. Actually, who doesn’t?
· Business model and traction: Does/will this company have a sustainable business model? Is the unit economics profitable? Does the company have a strong growth momentum? How long is the sales cycle and cost? Ideally the company should have a strong growth momentum with profitable unit economics.
· Exit options and comparable: What are the potential exits? Certainly, VCs love IPO, but it is safe to have strategic buyers as well. Has any other company in this space got big success (IPO, large acquisition)? If no one has built a large company before, the chances this company make a difference is small.
· Deal dynamics: this company may be great, but is the deal too expensive? If there are 4 TS on the table, should I accelerate? If no lead investor yet, should I take more time to think about it? Fear of missing out could cause people make bad judgement but inability to make a decision is even worse
· Portfolio management: Besides making new investment, VCs also need support portfolio companies. They need work with founder and co inventor to grow the companies and eventually exit.
Yes, VCs need think hard about a lot of things. Many people think VC is a fancy job, but it is actually also a very challenging job. However, Entrepreneurs have an even harder one. I admire and support all the founders. It takes a lot of strength, courage and persistence to build a company. For an early stage entrepreneur, after he (she) wakes up and before he sleeps, usually he thinks about the following things:
· Dream big but start small: Yes, we all dream to build a unicorn. We all dream to build next Google or Amazon. We all dream to have a large impact on society. But a journey of a thousand miles begins with a single step. Instead of targeting a huge market and build a huge product, it is much doable to start with something small and target a niche market. If a startup can make a great product in a niche market, it can have a solid base to expand into related larger market.
· Assemble the best team: The biggest challenge for most entrepreneurs is recruiting. We all want to have an all-star team, ideally all co-founders have successfully built and sold companies before. But in most cases, entrepreneurs are not super stars, especially the first-time entrepreneurs. Entrepreneurs need convince other people to join them as co-founder and early employees. They need convince people to quit their job at Google and take a salary cut. This is hard.
· Focus on differentiation, not competition: Competition is good, because it means there is a market. If this is no competition, most likely the market doesn’t exist. However, we don’t want to put too much energy on what competitors are doing. We want to differentiate from competitors, not following them.
· Prioritize product offerings: there is a lot of things we could build, and there is a lot of market segment we could try. But we need focus and prioritize. One step at a time. Each day, entrepreneurs need decide how to allocate resources to build the most important feature or technology.
· Scale the business: From 0 to 1, from 1 to 100, along the road, growth is always challenging entrepreneurs. They need think about go to market strategy, build the right partnerships, approach the right customers, and etc.
· Find the best partner, not the best term sheet: fund raising is another full-time job. For each round, it could take from 3 months to 12 months or more. Some entrepreneurs have the luxury to choose from multiple offers, but most people struggle to get one term sheet. If you, as an entrepreneur, are lucky to have multiple offers, forget about the terms for a few minutes, and think about who do you want to work with for the next 5 years, who do you trust to talk about all your struggles and worries, and who can support you through the up and downs. Choose your investors wisely.
The matching between VCs and entrepreneurs is similar to speed dating. Some people say it is a number game. You have to play the game for a while to find the best fit. But I always believe it is best to understand and respect each other’s perspectives. Hopefully VCs and entrepreneurs can understand each other better and we will see more and more unicorns in the future.