Demystifying VC: What I have learned from talking to great investors (Part I)

I first heard the term “venture capitalist” from watching Ivana Ma compete on The Apprentice. I was a twelve-year-old watching Donald Trump hire and fire on a whim, oblivious that this man would one day become our president. I loved Ivana because of her sass and resourcefulness competing on the Apprentice. She was irreverent and bold — two traits I identified with.

After seven tech companies and a lot of reflection, I have decided to embark on my journey into venture. I’m not doing it because VC is sexy or glitzy. If anything, working at startups teaches you all that glitters is not gold. I want to become an investor because I want to enact change. As an advocate of diversity and inclusion, I think it’s important that we pick a different set of winners in Silicon Valley. I believe there is an entire marginalized class of founders who are overlooked because the current VCs in power lack the diversity and empathy to invest in people different from them. Consequently, we have an entire class of founders and underserved markets ripe for disruption.

I hope that writing about my journey into venture will help synthesize my knowledge and learnings. Most importantly, I hope sharing this information will help lower the barrier to entry into venture because knowledge is power.

1. What is venture capital?

When I first tried to crack into product management as a liberal arts major, I took every PM at Sunrun out to lunch and coffee. I asked what their definition and interpretation of a PM was. Each one gave me their own diverging interpretation. It was up to me to glean common threads, skills, and patterns from these convos. Like PM, venture is a very ambiguous space, even more nebulous than PM.

Ann Miura-Ko, founding partner from Floodgate, told me you need to develop your own beliefs and convictions as a VC. To stand out, you need to develop your own profile and definition of what an investor does.

2. Profiles for investors — to operate or not to operate?

Every investor you talk to will have an opinion on the operating VCs vs strategic VCs schools of thoughts. Former operators and founders who became investors will tell you operating experience is vital. Non-operators like Fred Wilson talk about how an operating role is not completely necessary to become an investor. Talk to a handful of VC partners and you’ll learn that there is no profile to become an investor. Operators who have built great companies like Hunter Walk, Megan Quinn, and Ken Norton will tell you about the importance of being hands on with your companies and developing a level of empathy as builders.

The way I see it, there is no one path or profile into venture but all good VCs have common characteristics.

Aaron Batalion, partner at Lightspeed Ventures, distilled the 4 core skill sets of VC:

1. Sourcing/network: ability to generate inbound deal flow. Have a compelling brand or network that yields inbound companies and founders to reach out to you.
2. Filtering (due diligence): ability to evaluate deals and companies with good judgement and financial, market analysis. This is where the MBA/analytical mind comes into handy. Based off the little financials (LTV) and metrics (CAC, DAU) you can gather early on, decide if a company is worth investing
3. Winning deals: this is a necessary skill especially at the partner level. How can you win a deal by proving to the founders they should pick you over the other firms? How can you add value besides just offering a check?
4. Governance: where operational skills come into handy. Board observance and hands-on help with building companies through recruiting, advising, and expert network.

Most good VCs come in with two out of the four traits. It’s very rare for an investor to have all four of these attributes.

3. Frameworks for venture

Because venture is a very bundled skillset it’s important to develop your own framework for the business. I’ve always loved systems level thinking and naturally gravitated towards frameworks and philosophy.

Ann Miura-Ko’s early stage framework on what founders and investors should really care about really appealed to me in its simplicity and concision. Early stage investing can be reduced to three important levers which all pull on each other.

1. As a founder, identify your large competitive advantage. How long, durable, and unique is this proprietary power/moat of a product, sevice, business model?
2. Who cares about your product/company’s competitive advantage? This helps you identify your target users.
3. Build a great org with the founders focusing on team-building, diversity and inclusion etc. It’s not just about hiring women and underrepresented minorities but also thinking about life stage diversity. How many people in your company are single? How many people are religious? Who commutes to work? Who doesn’t drink alcohol?

Seed investors create high torque for founder and their early ideas and products. Good investors are the ones who can take their founders through the mental maze and journey of achieving their first product-market fit and $1 million in sales.

4. Tracking your success as an investor

One thing you’ll learn as an investor is the fact that this is a lone wolf kind of work. You are rarely working on a team but rather in parallel with your partners and founders. Unlike product launches, it takes years to get feedback on how you’re doing as an investor.

Hunter Walk measures his success as an investor on the following five markers:

1. Survivorship: how many of your companies are still alive after X years? See your investments as a fleet.
2. Quality of the underlying business: how well are businesses doing in growth, revenue, engagement etc?
3. Quality of follow-on investments: who leads/invests in your portfolio company’s following rounds?
4. Deal flow stats: are you seeing deals before other people are? Are you leading rounds or coinvesting?
5. Founder NPS score: what are founders saying about you? How do yo measure your net promoter score? This is your goodwill and brand equity as an investor. Your brand as an investor is a direct reflection of the experience you deliver working with founders. What is your model for founders evaluating investors? Zal Bilimoria, managing partner at Refactor Capital, uses delighted.com to administer founder NPS scores.

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Huge thanks to Tiffany Zhong, Ann Miura-Ko, Hunter Walk, Ken Norton, Aaron Batalion, and Zal Bilimoria for sharing with me your insights!