Tough Decisions in Venture Capital
As glamorous as venture capital can get, it is also a very difficult profession. Unlike other professions, where one may need great in-depth technical knowledge in one field like chemical engineering, venture capital is a whole different ball game. You do need solid financial and due diligence skills, but you can get people to do that. We, the associates at my venture fund are the backbone that does that. But as I have risen above in the last few months, led teams, interacted with management at start-ups and partners like other venture capital groups, I am realizing that the whole game is different from the top.
More than any other industry, other than politics probably, venture capital (and private equity) is built on relationships and decision making skills. The entire deal flow in a venture capital fund comes from knowing other people and who knows whom. Thats almost driven by the top management, since they are the one who know many people in the industry that the young start-out employees don't. The top management get the deal from their contacts, make a decision whether to pursue it or not and then pass it on to the associates to start cranking out due diligence on the ones they decide to pursue.
But as I am discovering, that decision to pursue or not, can often be very difficult to make. For two reasons. One, is the fear of making a wrong decision and losing out on the next home run of the century. The second is the decision you have to make when it is associated with short time lines or other pressure.
For the first, the fear of losing out on the next home run, it doesn't really matter what decision you make. If you're good at what you do, you will do reasonably well even if you miss out on the next big run. Have a look at Bessemer Venture Partners' Anti-portfolio. The anti-portfolio is their candid way of admitting that they wrongly passed-on on many of the companies, like HP, Apple, Ebay and Google, that later were huge successes. But they're Bessemer. They're really good at what they do and have done reasonably well for themselves. But you and I, if we do that enough times, we can easily find ourselves on a losing game.
The other is the decisions you have to make under pressure. I just had my first experience on that and I surprizingly found myself between a rock and a hard place. In the end, I made a call and I really hope it was a good decision. Here is some detail without revealing too much. We were working on a deal that was referred to us by a great partner VC firm. We've really enjoyed working with them in the past and respect them too. We were asked to make a decision whether we are sure to move forward on the deal on a very short notice. Given it is summer and that we have to go through two different committees for investment, it is hard for us to make such a decision without polling a few of the various parties involved. Besides, the type of investment that this company would have been was absolutely new to us. So there was some fear regarding that at our fund too. But I have looked at the company before and like it a lot. I believe they have the potential to go out and capture a significant portion of the industry. In the end, I reluctantly made the call to pass-on, even though I didn't want to, to support our partners and to ensure that they don't lose out on the terms they've obtained by trying to squeeze us in. Oh well.
Labels: Private Equity, Venture Capital
