After 6 years at startups, I've made the transition into venture capital and joined Hummingbird. It has just been over 3 months since I began spending my days screening startups and talking to interesting founders from all around the world. Thus far, my transition from a founder's role into an investing and advisory one has been a breakneck, intense education.
Some parts of the job are as I expected but others have been somewhat surprising. Before it all becomes a blur, I thought I’d share some of the most interesting and unexpected observations I've made so far;
#1 Being a VC is a very UnStRuCtUrED job
I believe there are two underlying reasons for that:(a) While VCs invest in some of the most ground breaking technologies out there, most of the industry relies on the most elementary tools (think 'ECE' = Email, Calendar and Excel);and (b) the fear of missing out on a deal combined with the amount of available company data — makes it almost impossible to keep laser focus on one deal or one vertical, which results in a rather chaotic workflow.
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great entrepreneurs make the most of the cards they're dealt, while great investors fold until they get a good hand. optimism vs. discipline
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In contrary, being a good VC requires a lot of discipline and patience. Many people think the best VCs make a ton of deals, however some of the most successful VCs don't really make a lot of deals.
#2 Meaningful Exits and Fierce Competition
Source: Meaningful VC Exits by Samuel Gil, CFA
There has been a lot written on this topic already, so I will keep it brief. For a normal sized €50M European fund a meaningful exit is around €80M, and a home run that will return the entire fund, is a €250M exit.
For founders this obviously means that their startup must have the potential to generate significant revenues in order to raise interest from VCs. It's good to note that there are also many startups that don't want or need investor money.
Now, to put things into perspective— for example, in 2013 there were around 1800 exits. Out of which 45% were for less than $50M, 72% were for under $200M, and just 1% were in the billion dollar club.
Source: TechCrunch
Last year there were 3260 exits. Out of which 44% were acquired after Seed or Series A (61% including Series B and Convertible Notes). Hence, we can see a general trend of companies getting acquired sooner ~ at a lower valuation. If we look only at Europe, there were 658 exits. So my educated guess; there were around 240 meaningful exits, and 60 home runs.
According to CrunchBase, only in Europe there are over 10,000 investors, of which more than 1700 are VCs. I think realistically the number of active investors is significantly lower; so I'm guessing there are around 900 active VCs in Europe. But still, quite a competition, right?
#3 Figuring out how not to drown in the ocean of data
On any given day, there are between 40 and 50 VC deals taking place (that's over 1200 deals on a monthly basis). (Disclaimer: those are just publicly announced deals) Next to that, startups raise funds from angels, incubators and crowd-funding platforms. In addition, there is a ton of conferences, demo-days, startup competitions, and industry curated lists. And not to forget the endless stream of articles, tweets, newsletters, and press releases. As a VC, I need to constantly keep up with four types of data; (a) Company Related, (b) Investor Related, (c) Founder Related, and (d) Industry Related.
Another big topic is company data. There are tens of databases out there — like CrunchBase, Mattermark, AngelList, CB Insights, PitchBook, DataFox, Index.co, DealRoom, Product Hunt or LinkedIn. And some of them already cover millions of companies. So in theory you shouldn't really need another source of data, right? Well, the truth is, you kind of do. Again, there are a couple underlying reasons for that;(a) Accurate data is scattered across many sources and it tends to get outdated every 45–60 day(b) Many times you still end up missing valuable data pointsand (c) Do you really want to rely on the same data as everyone else?
To put things into perspective again; only last week I screened around 21,000 companies of which 78 passed my screening (0.37%). And out of those, I might take a deeper look at 4 or 5 companies (0.02%). That’s roughly 1 out of 5000. And it’s good to note the list I was screening was already somewhat curated.
#4 Literally, everything becomes relative
For every success story, there is a better one. For every funding round or exit, there is a bigger one. And for every metric, there is a company that achieved it faster. And at some point, I think you need to learn to accept that, and stop with the constant comparing and benchmarking. Otherwise, your are risking that you will start feeling quite miserable.
I've seen 18 year old founders who are already outstanding CEOs. Nowadays there are even 19 year old VCs, and 13–14 year old teenagers starting deep-tech companies. The impact of technology on entrepreneurship is truly amazing, especially in emerging economies.
I remember one of my close friends always used to complain about the size of European funding rounds compared to the ones in US. I think nowadays the difference isn't as big anymore. However, if you think some funding rounds and valuations are crazy, I suggest you to have a look at some of the rounds that are taking place in China.
#5 The Age of Reverse Entrepreneurship
If you are reading this blog, I guess you are already familiar with the concept of Reverse Engineering. For the past few weeks, I've been working on an essay in which I argue that entrepreneurship is currently going through a very similar phase. I still need to publish it, but to give you a bit of a sneak peek;
At the beginning of this century, Internet was mainly about aggregation — the collection of related items of content so that they can be displayed or linked to. A great example is Craigslist a classified website launched in '95, which covers everything from jobs to housing.
Source: CB Insights
In 2010, Andrew Parker from Spark Capital published this now well-known chart which highlights the different startups attacking different parts or of Craigslist (also known as “Unbundling Craigslist”). Now, a couple things to consider — only by 2015 those startups raised over $10BN in funding, and the chart only covers US companies. Try to imagine the same chart including all their global counterparts.
Of course, not all of those startups got their inspiration from Craigslist. But what I'm getting at is that from aggregation we are moving towards hyper specialisation. And this is happening through the process of Reverse Entrepreneurship.
There are a couple additional trends that support this thesis;(a) Copycatting; companies first launching in Europe — then, as a second wave in emerging economies (obvious example is Rocket Internet);(b) API Economy; with the rise of APIs, we see companies piggybacking on the popularity of others;(c) Uber for X fad; how many times have you heard/seen a startup saying that they are building the “Uber of XYZ” or “Amazon for ..”;and (d) Sharing Growth Strategies; the concept of Growth-Hacking where companies share their most successful marketing experiments with others.
This trend becomes especially apparent when you become a VC. Since I joined Hummingbird, I already screened tens of thousands of companies — and honestly, I would have a really hard time putting together a list of 20–30 companies which have a truly original business.
#5 “..all I know is that I know nothing”
I admire people who confidently put the word 'Expert' in their online bio's. As for me, every day I learn more but know less. On any given week, I speak to ~40 companies ranging from Logistics to Blockchain or Machine Learning. And it's really really difficult to keep up with all the new tech developments, industry shifts and disruptive ideas.
(And I'm saying this from a perspective of someone who is digitally savvy, and who has experience with working with clients across 70+ industries.)
I think the most important VC skill is the ability to ask smart questions. That is — challenging questions that help to keep the conversation both engaging and as efficient as possible. And that doesn't come without a lot of learning.
Written by Dominik Vacikar.
Views are my own and don’t reflect the views of my employer.
Feel free to contact me at;[email protected]