Plenty parts of the entrepreneurial ecosystem look up to VCs. The deep analysis we do generates predictions about the future, and the funds mandated means VCs have the power to decide which ideas and founders are worthy to pursue such future. And of course, who wouldn’t look up to a powerful fortune teller if you knew one?
However, the reality is that VCs are no fortune tellers. Nor are we as powerful as some believe. Here’s why.
Venture Capitalists do in fact spend a fair amount of time conducting various type of deep analysis. We try to understand market opportunities, founder capabilities, technology trends, user engagement, and so on. Sometimes VCs do this analysis in a proactive manner and create a “thesis” about the future, and sometimes this is developed reactively based on founders we meet who make a compelling case. The output of our entire analysis is an investment hypothesis, which basically is an articulated reason to bet on a specific company at this specific time in history (timing is everything).
But despite the deep analysis done, most early-stage companies VCs back, don’t end up changing the world nor generate massive value creation. In fact venture returns follow a power law distribution, where a tiny percentage of companies represents the absolute largest share of return. Without using fancy lingo, what this means is that VCs in their deep analysis are wrong most of the time, but when correct it pays off.
However, very few of us ever hit that big winner, which means that behind all those fancy VC logos and well-articulated investment thesis very few have actually ever made any returns.
It’s very easy to have an opinion about the future. And VCs have many of them, including myself… But it’s exceptionally difficult to be right the future. The analysis we do is an important framework to help us think about the future, but we are still incorrect most of the time.
It is true that VCs sit a very interesting gateway of decision making, where the world comes together to decides on which ideas are worthy a shot (= investment) and which ones aren’t. But people often mistake VCs as being the almighty Saint Peter who alone controls the power to open the “gates to heaven” by fueling companies with funds. The reality is that the power does not sit with the VCs; the power sits with the entrepreneurs. The reason is simple.
VC is a way less differentiated product, compared to entrepreneurship.
First of all, money is essentially all green. Any $ or € from one firm will not in its monetary form have any difference in value if it came from another firm. Secondly, all VCs offer various portfolio support, which range from sales relations, hiring assistance, strategic guidance, marketing tools, governance, etc. Some funds choose to dial up certain parts of this more than others with dedicated teams, often as a result of the level of capital under management used to fund these services. But all modern VCs fundamentally think very similarly around where we believe we can impact a company and where value-added efforts in time and resources can be leveraged.
Compared to VCs where most of us look and feel similar to one another, every startup is unique, especially if you take those rare companies who fit into the pinhole of the “VC model” in terms of addressable market size, team capabilities and traction. If you are a founder to one of these companies, the reality is that you are in power. You will choose who to raise money from. The scarcity of these companies is far greater compared to the abundant number of entities and individuals out there who can write a check.
For those who aren’t used to it, spending a lot of time with VCs can be overwhelming due to the vast amounts of convincing opinions being articulated left and right. But remember our opinions and analysis are most often incorrect. We can’t predict the future. Founders know their market, product, and business way better than any VC does. Use thoughts and analysis articulated by VCs as input into your own decision making, but don’t allow yourself to get distracted and derailed just because of what a VC said. And finally, know your own value. If you build an amazing business, VCs will fight over you. Founders control their own destiny — not VCs. 💪 👊
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