Tag: Venture Capitalist

What do Venture Capitalists Look for in a Startup?

Billions of dollars are invested in new startups every year. Therefore, it has become even more important to find the answer to the following question: what do venture capitalists want?

A venture capital firm called Draper Fisher Jurvetson (DFJ Venture Capital) that has injected funds in around 2 dozen unicorns, including Twitter, Tumblr, Skype, and Box. One of its partners, Steve Jurvetson, shared his views on what he looks for in a startup when he plans to make an investment

 

Enthusiastic Founder

Jurvetson said that the first thing he notices is how enthusiastic the owner of a startup is – someone like Elon Musk who can convince that their idea will work. However, he added that it has to be in a sector which will contribute to the rapid growth of an economy during the times of huge disruptive change.

 

Innovation

In today’s rapidly changing world, innovation is a key to success. Products, such as electric cars, rockets, synthetic biology, etc., have proven to be the game changers in the IT sector. They never managed to attract venture capital in the past decades, but are high in demand nowadays. These industries have undergone massive change in the past few years, which is good for startups.

Investing in anything that takes an investor out of his comfort zone is worth it, because it leads to those crazy ideas that can change the world. However, it should be noted that it is those successful ideas that were never considered good in the beginning.

Jurvetson said that if an idea is strongly supported by a few number of people who believe it to be the future of the world, but the majority is against it, then it is a good sign.

 

Respect for the Team rather than Individual

Another factor he looks for is a founder who has respect for the team rather than individuals at work, a trait that contradicts the cult of a one man (in this case, a CEO) running the show. Having the self-confidence to stay humble about the proposals made and respecting the team are some of the additional attributes of a good startup owner.

 

What Sectors to Invest?

When talking about what sectors should venture capitalists invest in, Jurvetson hinted to Moore’s law as to how it’s penetrating into different sectors and turning lousy, low margin businesses into innovative software based businesses. Tesla is a great example that changed the course of different industries. Its contribution in the Planet labs, SpaceX, or automobile industry is a prominent example of the transitions made.

It took decades for these sectors to see entrants who transformed these industries through product enhancement. A number of investments failed during the process, yet, they are all IT based now and have gone through a massive transformation. Innovation has brought so many changes in the IT sector. For example, application of machine learning was considered a geeky subject a few years ago and only a few people at Google and other companies that worked on image recognition were familiar with the concept. But these techniques will now be widely recognized in every industry as they represent a new way of doing engineering.

 

A Way Forward

Remember, it is a two-way street. The world will experience the breakthroughs only if big companies welcome the evolution of technology. Jurvetson said that large companies that embraced innovation were the most exciting ones. A good example of this is Apple and its achievements over the years. Most of the large companies do not welcome meaningful innovations, which represent a connotation of disruption to depict the change. Embracing the change doesn’t mean a mere 10 percent improvement in processes, it shows a wow factor, such as freeing the automobile sector from gasoline consumption.

Similarly, back in the days, going to space was considered a tough job. Only a fighter pilot could qualify for a space mission with lots of training. But it is not going to be the same in future. SpaceX will soon launch a robot spacecraft where an astronaut will sit back and take a ride on the spacecraft. If the company is successful in doing that, space flights will become as frequent as air flights providing the same level of safety and fun.

Therefore, for a new idea to be successful, investors will have to support the change and big companies should embrace it. Not only will it be beneficial for a global economy, but will also make room for game-changing breakthroughs.

How Important is Experience in Venture Capital?

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.