The VC Check List

Here are some things you should know right away about VCs. Most VCs fail. They are just like startups. They have build and motivate management teams, source capital and strategic partners. They have to raise all the time from – pension funds, endowments, family offices, corporate and operating funds.

Here are some reasons why other funds though are not always the best idea. Accelerators/incubators get a huge volume of vetted opportunities and valuation can get inflated very quickly. AngelList stimulates the herd mentality of the stock market. You may need to spend a lot of time and money at University and tech R&D shops in investing into the idea. VCs model after PE practices.

Value comes from:

  • Cash
    • Does it have a meaningful budget? Does it use tech to share knowledge?
  • Brand
    • If it doesn’t have a strong brand image, is it co-investing with other shops?
  • Network
    • Does it have a CRM system? What kind of intros do portfolio companies need and can the team provide it?
    • Does it need to rely on external networks?
  • In-House Expertise
    • What is the fund manager’s background? Does the team have relevant background and operational expertise?
    • Does it have external consultants?

Good VCs come from:

  • Great management teams
  • Operational value creation expertise
    • Strategy scoping
    • Competitive positioning
    • Defining the target market
    • Scoping the product
    • Defining the right skill for each stage of the life cycle
  • Well-developed portfolio operator models
    • Optimize the team
    • Admin, accounting, legal, technical capabilities
    • Capital-raising
    • Recruiting
    • Identifying the right customers
    • Access to vendors and investors
    • Measure and understand metrics

Q&A

  • Q1. What is the sector size? AUM? The latest fund size? Latest progress, strategic partnerships, follow-on capital?
    • A portfolio size should have 10 – 30 companies based on sector and stage of investment. For software venture fund, it may have as many as 30 companies in its portfolio. The capital needs are lower, risks are deemed higher, and growth rate of companies is higher. In comparison, life science companies need larger amounts of capital and time to reach maturation, so life science fund may have a dozen companies.
    • On a portfolio basis, funds should target a 20% or more on an annualized basis rate of 2 to 3 times the invested capital. The internal rate of return (IRR) is to make 10 times in 3-5 years after the exit or selling a startup ideally after investment.
    • Most fund managers should have a diversified portfolio. Average total investment amount per company are typically no more than 10 percent of the fund to gain back the period within 4 to 6 years from time of investments with patterns of capital needs, company maturation and exit timing.
  • Q2. What do the investors look for depending on the stage of each fund?
    • Capital efficiency and target financial returns. Does it allow for generating venture-like returns?
      • Seed stage  – validate ideas, understand risk, connect to the market, help to find customers 
      • Mid stage – syndicate the investment, putting the rationale and leading the round
  • What is the market opportunity? What are key macrotrends? Is it large enough to source good deals? Does it have a competitive advantage in the domain?
    • The investment strategy should match skills and expertise of the team with the given market opportunity to generate superior financial returns. For instance, underserved regions can yield opportunities due to pricing advantages.

I also recommend checking out “founder NPS” the founder Bloomberg net promotor score.

Hope this helps!

The Business of Venture Capital