About eight years ago, I was coming off a couple of successes. I was an experienced CEO and thought of myself as a good “picker” so of course the next logical thing to do was to start a venture capital fund.
I mentioned this to my bride, Ms. Bry, and she suggested politely to me that if I proceeded to do something that stupid, she would be filing for divorce and would be speaking to my psychiatrist seeking to have my head examined and to perform an immediate lobotomy.
So you want to be a venture capitalist? This strikes me as similar to every successful actor wanting to be a director.
I turn now to Omri Amirav-Drory, a general partner at NFX, a well-known venture fund, who has shared some thoughts which I think are persuasive, and equally relevant to the entrepreneur.
“There’s only one thing you need to be an investor: capital. That’s it,” he writes in his article, “How to start your own VC fund.” Of course, that is exactly the one thing that the entrepreneur needs as well.
The holy grail is to be a “full stack VC,” Amirav-Drory writes. That is someone who owns the whole process, raising the money, sourcing the deals, adding value and creating outsized returns for your investors and the companies, he says.
If you can do that, you are in the rarified atmosphere of the 1% of venture capitalists. A very small club and very hard to do over a long period of time.
Amirav-Drory asks three questions of the would-be VC. Why you, why now and how exactly are you going to make “outsize returns”?
Clearly, you are going to need a secret sauce, he writes. Amirav-Drory explains in his essay that his was being a “scientist-founder” first and going through the entire sequence ending in a successful exit to a multi-billion-dollar company.
After that, he ed NFX, which has a “brand.” Only if you are a brand are you going to see the best deals and the best teams. And so the cycle repeats itself. The rich get richer.
I did not have that pedigree or that ability. So I went back to starting companies and begging those same VCs for money as always. (And staying married). The lesson here is to know your strengths and weaknesses.
The mantra of NFX is ground truth. “Most deals are bad, and great deals are rare,” Amirav-Drory writes.
Now let me take the other side. I just attended Connect Innovation Day. In attendance were more than 40 VCs, more than120 companies and over 3,000 people. San Diego is alive. And well. And money is looking for you.
I am not sure how many unicorns or even diamonds will eventually emerge, but the odds for this town are definitely improving.
The world of angel investing is one of the games today for the entrepreneur. Raise less than $1 million on a SAFE note (Simple Agreement for Future Equity), and make an MVP (minimum viable product), keep a low burn rate, solve a real problem that a customer will pay for, get early adopter customers and then go raise real money to scale.
NFX only hunts for unicorns. They compete against the very best and biggest of the venture funds. And to get the 100x return, a lot of things need to line up, some of which they can control and some they can’t (when the IPO markets open or close).
For most of us though, it is still a great ride to play small ball. However, some rules remain inviolate. It matters who you take money from, and lining up investor expectations early is critical. Think carefully about your board of directors.
In all the discussions and fantasies of changing the world (and getting rich), these basic initial decisions have outsize impact. And add one more complication – pick your co-founder carefully. Very carefully.
A final thought. As a VC you are betting on other folks. You have some agency, but in the end, you invest in a dozen deals and you hope.
As an entrepreneur, you are betting on yourself.
Pitchbook fact: “37% of first-time VCs will not be able to raise a second fund.” Carta fact: “Less than 10% of 2021 funds have had any DPI (distributions to paid-in capital) after three years.”
You know what they say about the grass being greener …
Rule No. 827: VC/AI – be careful of hallucinations.
Senturia is a serial entrepreneur who invests in startups. Please email ideas to [email protected].
