I posted my replies to an interview by national newsletter focused on entrepreneurship for the Angel Venture Fair, one of the largest early stage venture conferences in the US. Thanks to Marc Kramer, Columnist for Forbes and SmartCEO magazine, for doing the interview.
Q: Why did you write this book?
A: There are perhaps more than 10,000 VCs in the world but perhaps only about 1% are any good. In fact, although 95% of companies listed on NASDAQ are backed by 900 VC firms, 46% are backed by 5. How do the world’s top venture capitalists consistently obtain supernormal returns? How do they add value to entrepreneurs they have backed? That was the puzzle I was trying to answer in my book.
Q: What are the common misconceptions about venture capitalists by entrepreneurs?
A: There are two extremes. One type think they are vultures. The other just wants a check and think VCs are philanthropists. Although there are folks at these two extremes, most VCs are somewhere at the centre.
Q: What are the three to five things venture capitalists are looking for when deciding whether to make an investment or not?
A: It is like surfing a wave – you need a good team to catch the right market just like a good surfer can catch a good wave. A good team will, on average, yield 3 times that of a mediocre team with mediocre market. A good team with a great market will, on average, perform 12x better.
What we have also found is that choose a market where there are no or dumb competitors. It doesn’t matter how fast you run, but how fast the second guys run.
Q: What are the three to five mistakes entrepreneurs make when presenting to venture capitalists?
A: VCs like to see how quantitative entrepreneurs are. In consumer internet for example, do they track the metrics and keep track of traffic conversion under matrix?
Are the entrepreneurs willing to listen and pivot. In a business model discussion, the entrepreneur should have a sound reason why they picked this business model. What is the thinking process and what are the insights into other business model?
Q: What do venture capitalists look for in business plans?
A: The best VCs flip to the back and look at the numbers. If the numbers are interesting enough, then they look further. First is logic and coherence. But fundamentally is whether the business model makes sense. Then, whether the team can execute the business model.
Q: How important is it to have experience in your industry when trying to raise venture capital considering many of the great startups such as Microsoft, Dell, Oracle and Facebook, the founders had little business or industry experience?
A: The examples you listed are exceptions. Most of the time, the chances of success is greatly increased by industry experience.
Q: Do venture capitalists have a predisposition to investing in elite school students over others?
A: Elite schools have the advantage of drawing awesome talent – access to top networks, great education, preselection process, good stamp of approval and intellectual prowess. We have a portfolio company where CEO (from an elite school) has engineering background and can juggle complex math, sociable and does biz dev naturally and employees love him. We will back him any day.
Q: How hard is it to raise money today?
A: For Fundable companies – very easy. For not fundable companies – it is hit and miss. There are some dumb money around.
Q: The number of venture firms is almost half of what it used to be, will we ever see a resurgence of the number of venture funds?
A: In the dot-com days, there were many folks (most notably investment bankers) who hung out their shingle to raise VC funds. These non-performing funds last 6-8 years and take a long time to die. Failure doesn’t happen quickly in the venture capital industry.
Nowadays, there are more experienced smart money with well defined strategy, so these funds with a sales engine (good track record) will continue to succeed.
Q: If there is one piece of advice you would give an entrepreneur trying to raise capital, what would that be?
A: Don’t do it unless you have to do it. It’s a time bomb. And if you really have to, raise it from the smartest money you can get. I won’t worry about valuation and dilution – just focus on the smartest money you can get so that the enterprise can suceed. It is better to own 1% of Shell than 100% of a gas station.
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