How Important is Experience in Venture Capital?

In the world of information and technology, innovation is a key factor that drives the economy. Media is filled with success stories of founders in the Silicon Valley. On the other side of it, however, stands the venture capitalists who help these entrepreneurs materialize their dreams into successful businesses.

The venture capital sector in the United States is considered one of the key sectors that contributed to its economic growth. With the passage of time, the industry has faced massive growth around the globe and there is an increasing competition among investors to make it big. Some of the famous venture capitalists of earlier times are Tom Perkins, Tommy Davis, and Arthur Rock. In addition to the capital, it was their investing knowledge and experience that contributed toward the expansion of a tech industry.

Do You Need Talent for Venture Investing?

The venture capital industry has continuously evolved during the past few decades, and with that, some contradictions are brewing in the market. For example, the investors who dominate the market claim that they know how to choose a winner who would experience the same success as Facebook or Twitter did, yet, they expand the horizon of their bets, hoping that at least one of these will make it big.

This gives rise to a question:

Do you need talent for venture investing?

If so, what would it be?

The answer to this is simple; no! You do not need any special talent. Accounting or financial modelling skills are useful for venture capitalists, but it is important to note that early stage companies are not the same as public markets. In fact, they are run by owners who are still paving their way to success. The only thing that counts is the experience and skill of people who have already worked with startups and are ready to do whatever the job demands. Moreover, there is a common perception in the market that venture capitalists with a huge network of proven founders are the right choice, yet, you cannot rule out the fact that proven founders tend to ask for big checks, which reduces the share of a limited partner. New venture capital firms, on the other hand, are hungry to win and have the drive to listen to what startups want.

No Transparency in the Venture Capital Market

The venture capital market is not transparent, which is good news for venture capitalists, but not for the general public. Venture capitalists usually put their cash in long term investments, due to which, their outcome is not immediately visible. Therefore, it is difficult to measure the success and failure of any investment in the short run. Only a few estimations are publicly made available to compare the relative performance of one venture capital firm against another.

European Investment Fund — Evaluating Venture Capitalists Performance

European Investment Fund (EIF) is one of the very few institutions that have great access to venture capitalist funds for many years. In a recent report by EIF, analysis was conducted on the activities performed by venture capital firms in Europe over the last 20 years. Between 1996 and 2015, there were more than a thousand startups that were fueled by 355 EIF backed funds. According to the report, venture capitalists who were investing for the first time performed equally well as venture capitalists (VCs) with broader knowledge and experience, especially when the economy is booming.

Experience and Skills Matter

However, the explanation given in the EIF report was quite ordinary as they claimed to have good skills when it comes to choosing venture capital funds. It was further stated in the report that even the new VCs that have their backing perform well. But it did not have the coherence with another conclusion they reached in the same report, i.e., venture capital firms that carry out investments for the first time give a worse performance when markets are not doing well and these are the times when experience plays a vital role in defining the outcome of any investment.

This gives rise to another aspect of VC investing that is opposite to the perception of the industry; selecting a winning startup during the times when markets are booming is something newbies do as good as the experienced ones do, yet, the real test lies in avoiding losers and this can only be achieved with experience and the right skills.

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