Venture capital is broken. It’s broken because fund managers don’t understand what it takes to succeed. They likely entered VC because it was trendy and they saw big money in tech, but they don’t know how to dig in and execute on the work.
Like any business system, venture capital is a supply chain. Connect the right investments with the right opportunities, deploy the right amount of capital, and manage the investment. That’s a lot of work. And many VCs lack a deep understanding of this work. Too often, this results in the delegation of important tasks to talent that lacks operational experience. This has led to a graveyard of missed opportunities and less-than-stellar returns.
One example of this: analysts in the industry have been recruited with the expectation that they’ll learn on the job. At the same time, an analyst’s role has become so bloated that they’re doing work that should belong to a partner at the firm. Analysts are in many ways the most replaceable part of a VC firm, and yet they have become the front end of sourcing. I’m not saying that analysts can’t have promise or that they can’t be developed, but they’re pushed into doing partner-level work before they’re ready. Because of this, analysts deliver some of the worst advice to entrepreneurs. Unfortunately, many startups actually listen.
Being a good steward of money means that you, the VC, have to do the work required, and do it well. But what does this really mean? It doesn’t mean attending demo days and speaking at conferences; it’s more than modeling future revenue or creating term sheets.
Being a seed VC is helping to create a go-to-market strategy for a new category. It’s coaching new CTOs on technical vision and engineering hiring. It’s going out and bringing the first few customers to the deal table. It’s filling gaps when early team members quit.
As a venture capitalist, you need to be skilled in:
- Investor relations
- Research and analysis of industry-technology trends
- Identification of early opportunities that are off-market
- Portfolio analysis
- Due diligence (technical, markets, and people)
- Portfolio management/support
- Portfolio corporate development
- Governance and reporting
These are the big rocks that have to be managed. Some of it can be outsourced but the majority of it requires internal resources. It’s not that VCs have to do all of this alone, of course, but they should be highly involved in every aspect and delegate only to qualified people. It’s important to note: I’m talking about investing in seed stage, pre-revenue companies. Later stage VCs merely curate deals from firms like ours and depend on our relationship and diligence work.
I’m grateful that I’ve been able to elevate my career to become a venture capitalist. Not only did I have the confidence to invest my own capital, but I’ve been able to attract the confidence of other investors who believe in me. Being in venture capital is one of the hardest jobs I’ve had, second only to being an entrepreneur. And it’s a lot of work. But remember: management fees are paid by limited partners for the firm to do the work and do it well. Doing the work doesn’t guarantee top returns, but NOT doing the work definitely does guarantee low returns.
For my startup readers: next time an analyst gives you advice, ask them what experience they have operating a business.