Writing this blog piece because I find myself, quick accidentally in a small set of people who have experienced following:
1) Having been in Quantitative Development in Investment Banking IT for more than a decade with degrees in financial math I quite understand the economic models of VC funds (broad strokes).
2) Having spent the past 2+ years in Tech Startup space as a founder I understand the “founder” state of mind.
3) Having seen a startup need money and GuardX never seeking outside money (Bootstrapping!) I have seen the mindset from both sides of the capitalization divide.
So Dear founders – here is the true story about what a venture capitalist is.
1) The GP (general partner) you meet is usually one of a team of money managers or portfolio managers. They have worked very hard to secure money from LP (Limited Partners) to invest in start-up opportunities. You think raising 5 bucks is hard, think of raising 200 with just reputation.
2) The GP needs to produce 3X+ returns over 10 years to have a career and continue to get paid well. Assume that I (an LP) gives money to a VC fund with no returns expected for a decade. I would expect about 3-4 times the return on my money, or I would have happily bought dividend paying stocks and got a 5% yield all liquid added on SPY position and in 10 years would have most likely doubled my money even after buying some downside protection.
3) There are only a few winners and mostly losing investments (might be great start-ups but $$$ is what we are talking in this post) and very hard to tell the difference. I find it easier to think in terms of Poisson distribution with the rate of arrival roughly as a 4*#of IPO (4 is entirely WAGuessitmate for acquisitions vs IPO) in a given sector for success probability.
4) The GP has a very low signal to noise ratio. There are 1200+ startups today in cyber space alone with a huge herd following mentality going on. Look at RSA year over year. GP must filter fast to not get stuck in analysis paralysis.
5) The entire process is very inefficient. There is no dashboard screener, no quantitative measures, no K1 sheets, no score cards etc to look at. Hence the money chasing of founders associated with a good brand (Google, Facebook etc)
6) Time is not on their side. Everything that can go wrong will go wrong and they have a few hundred hours of total due diligence to decide if your team can make a successful outcome after all.
I hope this gives you a glimpse about the constraints and pressures on the mahogany side of the table.
The list could go on but you are not here to commiserate about the woes of the rich chap on the other side of the table, you want to know how to get funding for your “sure” thing. For that, I will write a new post next! Stay tuned and share this one.