This is a new series of brief insights from the Six Minute Strategist Blog which aims to give you an under the skin understanding of Venture Capital Finance. This is about listening to what the VCs are NOT saying and learning to think the way they think. I shall publish these periodically and would be interested to get feed back as to whether these insights are helpful.
To start then, Why VC investing is like Horse Racing…
The strategy behind Venture Capital investing can be likened to horse racing. We all enjoy going to the local course and putting a small bet on a fancied runner. Well this is exactly what VCs are doing except they would never tell you so. In these Venture Capital Posts, the Six Minute Strategist wants to help you understand Venture Capital investing by providing insights into how and why they invest. Armed with this information you can adjust your capital raising strategy and anticipate and address issues before they prevent you getting the funding you need.
Pick the Race…
The first part of the strategy is to pick the class of race you want to be in. The fancier the class, the more expensive the game. So if you are aiming at backing the next Google you need lots of analysts, smart offices in the Valley, top (and expensive) talent and a big fund. For horse owners, this is equivalent to owning your own yard, hiring the best trainer you can find and filling the stables with thoroughbred yearlings.
Find the Right Course…
Once you have decided on the part of the market in which you want to play, you need to select your favoured courses. In other words which sectors of the market do you think are the best ones to compete in. For a VC investor part of the game is taking a view on where the next big thing is coming from and trying to get in early. While they will listen politely to you talk about your competitive position and market, they are continually taking in hundreds of similar plans and pitches and evaluating them against each other and their future view of the market.
Choose your Horse…
The penultimate part of this analogy is about picking the horses. This is not the final stage. Investing in the right companies is only half the story. Assuming that the VC likes your proposal, they may have several similar proposals competing for their funds in the same segment. Choosing which is more likely to be a winner is their challenge.
Pick a Jockey…
The way this is done is the last piece of the jigsaw! Picking the Jockey. As we all know to our cost at the bookmakers, hot favourites are often beaten by lesser horses with great Jockeys on board. Management is what it is all about. History and track record are critical to the investment decision and when it comes down to it VCs back management teams.
As a final word, if truth be told in this market, VCs probably run this process in the reverse order. By following talent, if they hear that a serial and successful entrepreneur is putting together his next venture they want a piece of it, sometimes even at a high price. After all if it turns out to be the next Google who cares if they invested $5m instead of $2m?
Who said VCs invested strategically? Not me. My advice, put yourself in their shoes and learn to think like one.
