Our First Year in Venture

Venture Capital is an industry that many know of, but few know. I once heard that breaking into venture was statistically the same as balling your way into the NBA. Though, I would be hard pressed to find that analysis again if my feet were held to the fire. To help democratize the enigma that is venture, we’ve collected information from our 170+ member group about their first year in the industry ranging from 2008 to 2020 and found a few common themes.

What’s Changed?

Competition

Like the NBA, venture is extraordinarily competitive; and it’s only continued to get more competitive over the years. With so much money flooding the markets, IRR hurdles have decreased thus raising valuations and increasing round sizes. In turn, larger funds who can now put a reasonable amount of money to work in smaller companies have moved down market and become competitive with smaller venture firms. Even processes have been affected by this: 90 days to close has quickly transformed to 30-45 days to close, allowing for little to no diligence and a hefty reliance on your “gut”.

Diversity

It is no secret that diversity in all types of organizations is important. Diversity can lead to better decision making and increased profitability, making it an increasing priority for all organizations.

Let’s draw some parallels between the NBA and Venture Capital and discuss diversity at each level in the industry:

Principal owners of NBA Teams are comparable to Limited Partners (LPs) who supply the venture funds with capital

-          Diversity at the LP level remains an elusive goal – the root of change lies in wealth creation in diverse communities, which includes the investment of capital in startups lead by diverse talent working towards a successful exit.

General managers (GMs) of NBA teams are comparable to general partners (GPs) of venture funds who manage the deployment of capital to founders.

-          There are many programs and open recruitment efforts to diversify talent in VC funds. Diversity VC is a non-profit partnership promoting diversity in Venture Capital.

Investment of time and money on behalf of coaches and programs pre-NBA are an example of investment from ecosystem partners and funders at different stages of growth.

-          Diversity of thought comes from embracing the ideas generated by people from a wide range of backgrounds. Without diversity at the venture fund level capital investments in underrepresented founders will continue to be left behind.

Only .03% of basketball players end up getting drafted in the NBA. Tangentially, only 7% of startups exit (success for startup companies). Chances are already slim for success; we must ensure that everyone has a chance at success by addressing the hurdles facing our underrepresented founders.

Have open discussions about diversity within your funds. Think of ways to develop programming and events with founders to learn more about how you can be a partner

Geography

Gone are the days of startups needing to be superfluously stationed in coastal areas heavily concentrated with VCs like Menlo Park or New York. Ecosystems like VentureNext have helped enflame an already growing kindle throughout the Midwest, and with a chip on our shoulder if I may add. While the pandemic has had seriously detrimental effects throughout the U.S., one benefit for Midwest funding was the rise of Zoom and other remote enabling technologies. Virtual pitches became the norm and suddenly artificial barriers that have been erected since what seems like time immemorial collapsed with a whimper.

What do you wish you knew at the start of your career in venture?

Relationships

The old trope “it’s not what you know, it’s who you know” is something many of us wish wasn’t true, but still proves to reign over the alternative. A well-constructed network grants you access to decades worth of free knowledge whether it be deal sourcing, fundraising and co-invest opportunities, or market insight. A good network can be used to gain your portfolio company new customers and help capitalize them well into the future. As a VC, your portfolio companies are your bread and butter. The better they do, the bigger success you’ll be, and your network is likely the largest contributor.

Time

Time is something that all of us only have a limited amount of. Our schedules are jammed with back-to-back calls during the day leaving us to do our other job functions after the 9-5. Like those internal calls that always go long, everything you do in venture always seem to take longer than you think.

Legal

Not everything in venture is glamorous; In fact, few things are. Nights are often spent reading, re-reading, and reading again the 10th version of legal docs which more than often amount to hundreds of pages. Though we aren’t the ones writing the documents (which require a whole other skill and area of expertise), ultimately anything that ends up in the final docs are on the VC’s shoulders for better or for worse. A lot of time and energy go into the legal side of transactions.

I Don’t Know

As much as you may feel obligated to know everything, an “I don’t know, but I’ll find out” is often more appreciated and is seen as authentic. Nobody knows everything and pretending to only reduces your credibility.

What advice would you have given yourself back then?

Trust Your Gut

In this data driven society, we often get analysis paralysis. While reviewing the data is certainly needed, VC is a healthy mixture of art and science. The data can only tell you so much about a market or your managers. A gut check can help you identify red flags and rescue you from a bad deal.

Learn From Others

It’s easy to become a slave to your ego once you get into venture. The fact is that everyone is constantly learning. Like in most sports, it takes a team. It is important to lean on partners and peers to continue to grow as an investor.

Join our peer-to-peer network for investors who invest in Midwest companies! Learn more here.