ELIAN D. ALVAREZ

- VENTURE CAPITAL - ANGEL INVESTMENT -
- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

How Important is Experience in Venture Capital?

Apr
21

In the world of information and technology, innovation is a key factor that drives the economy. Media is filled with success stories of founders in the Silicon Valley. On the other side of it, however, stands the venture capitalists who help these entrepreneurs materialize their dreams into successful businesses.

The venture capital sector in the United States is considered one of the key sectors that contributed to its economic growth. With the passage of time, the industry has faced massive growth around the globe and there is an increasing competition among investors to make it big. Some of the famous venture capitalists of earlier times are Tom Perkins, Tommy Davis, and Arthur Rock. In addition to the capital, it was their investing knowledge and experience that contributed toward the expansion of a tech industry.

 

Do You Need Talent for Venture Investing?

The venture capital industry has continuously evolved during the past few decades, and with that, some contradictions are brewing in the market. For example, the investors who dominate the market claim that they know how to choose a winner who would experience the same success as Facebook or Twitter did, yet, they expand the horizon of their bets, hoping that at least one of these will make it big.

This gives rise to a question:

Do you need talent for venture investing?

If so, what would it be?

The answer to this is simple; no! You do not need any special talent. Accounting or financial modelling skills are useful for venture capitalists, but it is important to note that early stage companies are not the same as public markets. In fact, they are run by owners who are still paving their way to success. The only thing that counts is the experience and skill of people who have already worked with startups and are ready to do whatever the job demands. Moreover, there is a common perception in the market that venture capitalists with a huge network of proven founders are the right choice, yet, you cannot rule out the fact that proven founders tend to ask for big checks, which reduces the share of a limited partner. New venture capital firms, on the other hand, are hungry to win and have the drive to listen to what startups want.

 

No Transparency in the Venture Capital Market

The venture capital market is not transparent, which is good news for venture capitalists, but not for the general public. Venture capitalists usually put their cash in long term investments, due to which, their outcome is not immediately visible. Therefore, it is difficult to measure the success and failure of any investment in the short run. Only a few estimations are publicly made available to compare the relative performance of one venture capital firm against another.

 

European Investment Fund – Evaluating Venture Capitalists Performance

European Investment Fund (EIF) is one of the very few institutions that have great access to venture capitalist funds for many years. In a recent report by EIF, analysis was conducted on the activities performed by venture capital firms in Europe over the last 20 years. Between 1996 and 2015, there were more than a thousand startups that were fueled by 355 EIF backed funds. According to the report, venture capitalists who were investing for the first time performed equally well as venture capitalists (VCs) with broader knowledge and experience, especially when the economy is booming.

 

Experience and Skills Matter

However, the explanation given in the EIF report was quite ordinary as they claimed to have good skills when it comes to choosing venture capital funds. It was further stated in the report that even the new VCs that have their backing perform well. But it did not have the coherence with another conclusion they reached in the same report, i.e., venture capital firms that carry out investments for the first time give a worse performance when markets are not doing well and these are the times when experience plays a vital role in defining the outcome of any investment.

 

This gives rise to another aspect of VC investing that is opposite to the perception of the industry; selecting a winning startup during the times when markets are booming is something newbies do as good as the experienced ones do, yet, the real test lies in avoiding losers and this can only be achieved with experience and the right skills.

Is Funding Your Startup with Venture Capital Always the Right Choice?

Oct
13

With the rapidly growing tech-world, it has become quite common for startups to fuel their ideas with funds injected by venture capitalists (VCs). Whenever you pick up a business newspaper now, there is mostly something written about VCs or the early stage businesses that were funded by these investors.

  • But is it always the right choice?

In today’s fast pace environment, everyone wants to make huge profits as soon as they possibly can. However, as the old saying goes, “haste makes waste.” This is also true for businesses.

Although, venture capital investment may be a good choice for some businesses, yet, it comes at a cost of coping with high expectations held by these investors, which also results in many startups to fail. The fact is, new ventures do not need such investments all the time. Besides, simply because you are a tech-company, doesn’t necessarily means that you have to have your office in the Silicon Valley. There are many companies in the world of technology that grew organically and made it big. Though, the progress was slow, it was steady and made them even stronger as they made it to where they are today. One such success story is of the MailChimp. Started as a design consulting firm, providing email service as a side project, the company touched a revenue of $280 million last year in 2015.

Dan Kurzius and Ben Chestnut started the company in 2000. Some of their clients were demanding a solution to engage their customers by email, so they tweaked some old codes that were used for an unsuccessful online greeting card business. For the next few years, this project was run parallel to their main business. In 2006, however, they started having reservations. Having the entrepreneurial family background, both the founders were passionate about helping small businesses grow. Despite being in a critical state of its growth, they knew MailChimp was a low cost marketing channel for small scale business firms. So, in 2007, they packed up their web design business and shifted their entire focus to email service. So, what made it such a huge success?

 

Valuing What Your Customer Needs

Even when the company was fully focused on providing email marketing service to its clients, they faced a host of larger and better funded competitors, including Constant Contact.

  • What kept MailChimp retain its clients?

It was the trust their customers had placed in them. Chestnut said that it was their close connection with the customers that their rivals didn’t have. They knew what their customers wanted. They offered affordable services, which also allowed greater customization to cater the customers’ needs.
Learning to Make Money is More Rewarding than Spending it as a Startup

Co-founder of Basecamp, Jason Fried, said that you learn bad habits from raising money, for example, if you have some cash in your bank account, it makes you good at spending it. But on the other hand, if you have to earn it yourself, it makes you good at making it, which is a good habit for an entrepreneur to learn sooner than later in running a business so as to survive without relying on other people’s money. For MailChimp, learning to make money instead of spending it were just the essentials to keep their business running.
Understanding A Small Business is the Key

Although, MailChimp was approached by many potential investors from time to time, but Chestnut says that every time they had rendezvoused with investors, they failed to understand the gist of small business. They wanted to see the company at an enterprise level with a large number of employees
Chestnut further said that they were often told that they were sitting on a gold mine, but something about this idea never felt right to them. For the founders of MailChimp, it was all about proving to small businesses that they can do it just like Chestnut and Kurzius made it happen. Being a small business itself, this mail service company could understand the requirements of other small businesses fairly well. Despite the high level of uncertainty that persists in the tech-world, both of them feel that the company will run better if they control it rather than the outside investor.

Therefore, a startup doesn’t always have to let venture capitalists control them by fueling their ideas with a large amount of debt. Instead, they can be the pirate of their own ship and sail it through highs and lows the way they desire.