To VC, or not to VC, that is the question? 10 characteristics which make a truly great venture capital investor
J. Skyler Fernandes is ranked as a Powerlist 100 VC and is the Co-Founder & General Partner of Venture University, a multi-stage investment fund and trade school for venture capital, private equity, and angel investing
Q4 hedge fund letters, conference, scoops etc
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
As a VC for the past 10+ years, I have had the pleasure of meeting thousands of investors at many stages of their journeys, from analysts to first time fund managers to VCs with 30+ years of investment experience. As such, I am often asked what are the key factors in becoming a top VC.
Research suggests that entrepreneurial experience separates top VCs from other investors. However, one needs to only look at the amazing careers of industry leaders without an entrepreneurial background like Michael Moritz, Fred Wilson, or John Doerr to debunk that theory. In fact, a recent TechCrunch study found that on average, only 27 percent of the partners at a randomly chosen sample of VC firms in the US had experience working as founders or senior executives at entrepreneurial companies.
While first-hand experience of growing a business is undoubtedly a plus, experience has taught me that when assessing investors, more often than not, the difference lies in character and quality investment experience more than anything else. It's the point of nature (character) vs. nurture (relevant VC experience, which is rare and hard to acquire). You need both, but the challenge is that unfortunately going to a great undergrad or MBA, or working at a top investment bank or consulting firm, doesn't prepare you with the skills needed to be a great VC.
With that in mind, here are the top ten characteristics I believe make a truly great venture capital investor:
- Intellectual curiosity
As an investor, you never know what pitch is coming through your door next. As such, effective VCs need to be constantly clued in about emerging technologies and product trends, which requires constant learning. The best VCs are both broad and deep in their knowledge bases and are open to new ideas, and ways of thinking. The level of intellectual curiosity an individual has in my experience has been a key indicator of whether they will initially enjoy doing VC and be any good at it.
If all you've been is an expert and founder of a company in one particular field, it increases the chance of missed opportunities you may see and be comfortable with.
- Dynamic thinking
Great VCs are always thinking ten steps down the road, which can split into a variety of paths, and are able to be hyper-focused on business value and potential strengths, regardless of how ‘out there’ the pitch is. Many of today’s unicorns started off as a completely different product or service, so seeing various potential successful outcomes, and backing founders who can also think dynamically about their business to produce a successful pivot at a later stage is essential.
One of the interview questions I use to test this characteristic is ‘tell me ten or more things you can do with a brick?’ Potentially great VCs will have a lot of fun with this game, while those who get stressed might not be a great fit.
- High degree of stamina
Being a VC is draining. Many people enjoy pretending to be a shark on Shark Tank from their couch, but could you actually meet 5-10 startups a day and still be excited about your job?
Regardless of whether it is your first or last pitch of the day, VCs need to stay focused and be able to differentiate between misleading ‘shiny objects’ and the true ‘diamonds in the rough’. Just because you have seen five bad blockchain pitches doesn’t mean the next one might not be a winner.
I have had lots of success in the retail subscription box space because I have seen so many pitches in that space and learned through osmosis. Great VCs are able to look past a boring pitch to find the real potential.
- Networking abilities
Are you constantly networking both in the investment and startup communities and corporate industries? Your network is your toolbox, and the most powerful VCs know that by leveraging their networks correctly, they can create a network effect which can be used not only for deal sourcing but also to support their portfolio companies.
Being able to source proprietary deal flow through your network is probably the number one differentiator in top VCs, and is what keeps top VCs at the top with an unfair competitive advantage. Even if an individual investor that works at a top VC isn't all that great compared to an average VC investor, they outperform because of their access to top quality and quantity of deal flow.
When assessing potential VC investor hires, I often look at how many mutual connections I have with a candidate on LinkedIn, as this shows how much effort someone has put into cultivating their network.
But remember, quality always beats quantity when it comes to networking, so it's important to maintain contact with your network over time.
- Calculated risk-taking
Being able to take calculated risks is an art form. The best VCs are constantly assessing risk vs reward to get the biggest return across a portfolio of companies.
VCs need to develop key metrics and qualities they look for which allow them to quickly highlight potential outperformers. Over time this will develop into a strong gut muscle for when things feel right, but being able to do this without taking on too much risk means being extremely clear on what metrics or qualities are important to you as an investor. To do this effectively, VCs also have to have a good understanding of different markets and consumer trends to reduce market sizing and timing risks.
VCs need to be open to finding good ideas that initially look like bad ideas.
Sometimes entrepreneurs have unlocked a secret about a market that other people haven’t uncovered, so it's important to have an open mind when considering pitches. That said, it is still important to support logic with facts - so you must be able to think outside the box without getting carried away in the moment or with a shiny object.
- Willingness to get involved
Companies are looking for VCs who offer more than just capital. They want people who are willing to get involved and get their hands dirty. This could be helping the company meet business goals, find new talent or customers, or giving your two cents worth about the best direction to take the company.
In the past, I have become the interim CFO of portfolio companies in stormy waters, and have a ‘black book’ of more than 1,000+ industry contacts which I open up to my portfolio companies to help them accelerate growth. Your experience and network are equally as valuable as your checkbook.
Great VCs never say maybe, instead they find a balance between gut-based decisions and methodical/data-oriented decisions, which allows them to choose between two options: pass or invest.
This is especially important if you are the lead investor on a round, because if you can't make a decision quick, another fund may beat you to drafting a term sheet. If you are a co-investor then you may have more time as a round is coming together, but if a round is towards the end of being completed, you have to be able to move quickly too.
- Emotional regulation
To be a VC which people want to work with, it’s best to avoid coming across as cold hearted (a common criticism of VCs). However, while the best VCs have emotional connections and positive relationships with their portfolio companies, they don’t let this affect their decision making when it comes to crunch time.
The hardest part of being a VC is deciding whether to let your underperforming companies die gracefully, die-hard, or to put in the effort to help find a way to at least get some or all of your money back by finding a safe home for the company. You need to be non-emotional in how you deal with portfolio companies and most importantly build up your stakes in the ones that are actually performing the best.
Being too quick to let companies die leads to underperformance as a VC, but investing good money after bad can also quickly lead to little or no return! How you manage your follow-on investments, and how you help your worst companies without investing more capital, is a huge part of being a great VC.
- Business acumen
Having the ability to look across sectors and understand market sizes, market opportunities and market timing is essential. In the VC industry, being early is the same thing as being wrong.
While consultants are good at evaluating markets, VCs are often faced with the unique challenge of evaluating markets that don’t exist yet or are in their early days. In my experience, the best VCs can do an industry assessment of market size on the back of an envelope, based on solid logic alone.