I remember the day I signed my offer letter. A fresh faced college senior ready to move to SF and jump headfirst into the world of venture capital. It was like winning a lottery ticket. I intended to take full advantage of this opportunity and dove headfirst into building my foundational knowledge of VC. Meeting seasoned investors and chatting with my peers to absorb the tricks of the trade as fast as I could. At the time, everything I observed and learned felt like foundational knowledge. Every bit of observed VC behavior became a universal law as I wrote my personal VC manual. I had a reasonable understanding of what good venture capital is. Or so I thought.
One of my first observations was that VC has long feedback cycles. It takes 10-12 years for startups to mature and exit. It’s hard to evaluate your ability as an investor until your first cohort of investments exits - a decade later. People around me were progressing faster than an investment life cycle. That must mean VC firms are using some other proxy metrics to judge performance.
Following this train of thought led me to the big venture trifecta of TVPI, DPI, and IRR. Honestly, I wasn’t looking at them as my true north metric for my LPs, but more as a proxy metric for short term career growth. I don’t need to wait for my investment to exit and turn into DPI to get promoted because TVPI is my friend until then. Plus, my friends were climbing the VC ladder based on mometum follow on rounds and brand name co-investors. This was the game I thought I was playing. Invest in momentum deals with “hot” tier 1 co-investors. Since I was at an early stage firm, the goal, was to get any allocation in a hot deal. A quick markup would be a notch in my belt. String together a few of these from A16z and Tiger and I am winning the VC game.
Looking back now, my initial approach is laughable. My friends that learned the trade in the ZIRP era of VC suffered from a similar distortion. Not that I was aware of the relationship between interest rates and the VC landscape at the time. But now, after stints in venture in Boston and now Atlanta, a front-row seat to a black swan event in COVID-19m and weathering high interest rates leading to a VC funding slowdown, I feel like I have seen VC through a more nuanced lens.
In this maturation, I had to unlearn and relearn the VC game. In this reflection,I had three key realizations that influence my thinking as a VC today.
I remember my first big “win”. It was a pre-seed investment in a company that quickly raised another round from a well known VC firm. At the time, I celebrated this as a validation of my ability as a venture capitalist. Now, I think of this as a vanity event. Fundraising is not an indicator of product-market fit. At best, it might mean the founder is able to convince a non-zero number of rich institutions of the company’s vision. But a company’s ability to ingest money has no implication on its ability to ultimately distribute money to its shareholders through a successful exit or IPO. It’s jarring to realize that. If you are the sort that needs examples, Quibi, Fast, and Bolt recently raised hundreds of millions of dollars without ever coming within sniffing distance of product market fit. I have Bolt and Fast hoodies in my closet only to remind me of this every day. Venture is about making educated bets in risky assets so this should not have been surprising. But it was. Similarly, it’s easy to fall into the trap that successful funds are successful because most of their investments are successful. So if they invest in a company, it must be true that the company is likely to be successful. This is a logical trap I have seen play out hundreds of times. Brand name VCs are still subject to the same power law as the rest of us.
Second, consistently participating in competitive deals depresses returns. As funds compete, entry price increases. If you consistently pay too high a price to get into deals, you are not getting a reward commensurate with the risk of investing in an early stage company. If a measure of a good venture capitalist is driving returns for LPs, then why give away returns chasing consensus deals and relying on other funds’ brand and momentum check writing to drive my performance as an investor? Doesn’t make sense.
Third, the VC job is much more than simply getting into deals. Making an investment into a company is literally the beginning of a decade-long partnership. Ultimately, VCs are evaluated by their LPs on DPI or returned dollars. That means companies need to increase the value of the equity through business performance and growth and then drive a liquidity event, either an acquisition of an IPO to ultimately generate real returns. At the beginning of my venture career, this aspect of the job was opaque to me. After each successful wire, I was on to the next deal. Over the past few years, I have been fortunate to work closely with entrepreneurs at various stages in their journey. From helping a founder navigate a difficult exit, to supporting a founder develop a go-to-market motion in a difficult market. Some days, just being a cheerleader and helping a founder talk through an important business dilemma. Playing a small part in helping them navigate the daily challenges of building a meaningful enterprise gives me energy. But more importantly, it’s a critical support function to building a bigger business and creating equity value. Now I realize that getting into a deal can be the most trivial part of the job. It’s after the money is wired that the hard work begins.
Finally, it’s important to not make the same mistake I made earlier in my career. There is no universal right way to be a venture capitalist. The landscape is constantly changing. I started my career with only a keyhole view of this vast dynamic venture terrain. It would be a mistake to assume that my current experience in a down market is not. Firms that were successful in the 80s with a specific strategy are not around in 2023. Some firms that didn't exist pre-2008 are now considered Tier-1. Firms that could raise billions without batting an eyelid, are deliberately reducing their AUM because they realize they don’t have the same edge anymore. $1B firms are competing with AngelList solo GPs for the same deals. Super angels are leading rounds. Growth investors are leading pre-seed rounds.
Venture is like a 100 lap F-1 race. After enough laps, you might know where the corners are, but the corners need different approaches based on your car, the weather, softness of tires, speed, and the other drivers around you. The current high interest rate environment is only the latest shift I have seen in my journey, following ZIRP and the black swan event in COVID. With each shift, I have been forced to evolve and adapt as an investor. I am no longer trying to constantly optimize my approach to fit the current zeitgeist. I am more focused on building a swiss army knife of investing skills and applying VC first principles to a wider variety of situations. Here is to the next 97 laps.