(This is an interview with Hambleton Lord & Christopher Mirabile, angel investors & co-directors of Launchpad Venture Group who co-founded Seraf – a portfolio solution designed to address the challenges of managing and valuing early stage investments)
Raising capital for your fund from Limited Partners: Unless your venture fund has a captive source of capital, such as you and your partners’ personal funds, a corporate sponsor or a government sponsor, you will end up spending a fair amount of time and travel dollars pitching to many potential LPs. So make sure at least one person on your venture team knows what it takes to sell and knows how to close the sale!
Finding great companies to invest in: Venture capital is all about investing in the future. You are betting on teams today to create things that are going to matter 7-10 years in the future. A great VC anticipates and understands market trends. As a forward thinker, it’s not easy being ahead of the pack. Many of your investments will be too early (i.e. your market timing was off) or derailed by other market forces. You have to be a big picture thinker and comfortable making decisions without a lot of supporting data as you judge long term market potential for new ideas.
Doing thorough due diligence on potential investments: Comprehensive diligence on a startup company requires a fair amount of effort. Once you have satisfied yourself that the big picture frame of reference justifies further work, you need to shift gears and get down into the nitty gritty and try to spot issues that might be deal killers. You will cover topics such as viability of the technology, size of market opportunity, competition, go-to-market strategy, financial plan, etc.
In many ways your most important assessment relates to evaluating the CEO and her management team. The quality of the founding team is perhaps the biggest factor in startup success. Another key, often overlooked, skill relates to your ability to be decisive and make important decisions quickly. There’s nothing worse for the entrepreneur than having a VC string them along and not pull the trigger on either a quick yes or no. Slow decision making will hurt your reputation in the venture community and may cost you deals lost to your faster competitors.
Negotiating and syndicating deals: This role requires a few important skills. First, you need to understand how venture investments are structured from a financial standpoint. When you negotiate an investment with an early stage company, valuation is only one of many variables to consider. Envisioning a long term funding strategy for the company and making sure you are in alignment with the management team and co-investors on potential exit strategies is vitally important.
Another key skill in this role relates to your ability to sell to both entrepreneurs and other venture investors. By this, we mean your ability to come to a fair agreement with the company on deal terms, and where appropriate, syndicate the deal with other investors to help fill out the financing round.
Helping your portfolio companies succeed: Startups find new ways to fail every day. As a VC, you have to accept company failure as part of the job. But, that doesn’t mean you should sit on the sidelines and pray for success. Hope is not a strategy! VCs need to be active partners with their portfolio companies. Frequently, they take board seats where they add value to the company. Great board members have an ability to provide guidance and support without the ego-driven need to control or dictate everything. And, their prior business experience should help a company make decisions that lead to success. Not everyone is cut out to be an effective contributor to a startup board. These are some of the most important skills and personal characteristics for a board member: Temperament, independent thinker, proactive, committed, networked, strategic, thoughtful & observant, informed and supportive
What’s the right number of partners at a venture firm?
Well, that depends on a variety of factors such as fund size, target portfolio size, number of expected board seats, and expectations regarding per-partner fee and carry income. You need enough partners to be able to manage the workload and cover a broad experience base, but not so many partners that decision-making and meeting scheduling are cumbersome and per-partner income is diluted beyond an acceptable level. That said, we believe that even for a very small fund, it’s wise to have at least two GPs. Even the most talented individual will be weak in a few of the skills we discuss above or weak on the administrative details of running a fund. In addition, most potential LPs are looking for some bench strength on the team and won’t want to invest in a single GP.
Another common configuration on a venture fund team is to have one founding GP with one or more Managing Directors and/or Venture Partners to help run the fund. How you build out your team and establish job titles is up to you as a founding partner. Just make sure everyone is clear on their roles and responsibilities.
What other personnel resources are needed within a successful venture firm?
Fund economics will drive some of your decisions on what resources you can afford to help manage your fund. A small firm with less than $20M under management might choose to have the GPs do all the work with the exception of legal, tax and accounting related tasks that are best handled by outside professional firms. For firms with bigger budgets, there are a variety of positions that need filling. These include: Analysts, Finance and Administrative, Marketing and Advisors.
Suffice it to say, there are few types of work which require a smaller team to cover a wider swath of competencies than venture capital. Good VCs tend to be very well-rounded people, drawing on skills typically associated with each end of the introversion/extroversion scale. VCs need the networking, communicating, people-skills kinds of traits which tend to be attributed to extroverts. And, they need those analytical, detail-oriented, self-guided, independent thinker kinds of traits which tend to be attributed to introverts. The team approach can help balance people out, but only to a limited degree.
For reasons having to do with fund economics, teams tend to be relatively small. And for reasons having to do with accountability and ownership of one’s own outcomes, each VC tends to run his or her own deals from inception to exit. So it is work that realistically only suits a subset of people. Put another way, while virtually all very successful VCs tend to be pretty smart, well-rounded and accomplished people, not all smart well-rounded and accomplished people are meant to be VCs!