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Anonymous

04 Dec 2019

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General Investing

What are some misconceptions of Venture Capitalists?

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Speaking from the perspective of someone who has been in VC for around a decade, here are the common misconceptions:

1. VCs are competitive, and don't share information with each other

Not necessarily. In South-east Asia for example, you do see funds co-investing in companies together. Information exchange amongst VC funds is also common. What I have seen is that VCs are more collaborative than most people think.

Which is why it never is a good idea to 'tell' a VC that you have already gotten an investment offer for say, US$1m in seed funding, from XX Fund, in order to get a competitive bid. It's very easy to verify.

TL;DR: Don't lie about anything. It's easy to cross-check with other VCs.

2. VCs only contribute money.

Seasoned entrepreneurs would know that they should be looking for VCs who not only can contribute capital, but more importantly other factors:

  • Market access
  • Introduction to connections that you would not have been able to get as easily if operating by yourself
  • Ability to recruit top talent
  • Ability to help company get further rounds of funding later on

3. VC likes to see team, team, team.

While it's true that strong teams are important, strong teams alone are not a great indicator of a successful company and implied 10x returns to funds. There have been cases where the team is led by a serial entrepreneur, and with veterans. More often than not, the companies is handicapped due to payment of high salaries, before it hits any kind of commercial success. A management team paying themselves upwards of $10k each, while the company is making a revenue of $5k a month, shows a big misalignment of company objectives vs personal gain.

4. You cannot reapply to a VC.

Not true as well. In fact, it's even better IMO if the partner at the VC has known you for some time, and followed your journey. Even if the VC had rejected you earlier, they would still be keeping an eye out for what you do post that, especially if they are interested in the sector. If you show resilience and are able to hit key milestones sans funding, it is a good indication to the VC.

5. The VC will read your fully fledged business plan and financial projections before the first meeting.

Given that VCs are usually inundated with hundreds/thousands of pitches a month, it doesn't make sense to go through all the information you sent through, even though it might have taken you alot of effort. VCs know that actual business performance is usually a far-cry from projections anyway. They want to see how sound your assumptions are, as opposed to how accurately you can predict future financial performance in a spreadsheet.

Misconceptions

1. VCs get approached with pitches and business proposals they will read through before deciding whether to invest.

A lot more goes into the work behind that. First of all, the more established your VC name, the greater inflow of investment proposals and pitch ideas. Not all VCs have the luxury of enough quality inflows and thus resort to researching and sourcing potentially promising companies to invest in.But it is true the idea must pique the VCs interest before they decide to consider and research further. It is simply inefficient and frankly impossible to evaluate every idea in depth.

2. VCs invest in companies purely based on their financial projections and ROI.

VCs cannot simply trust financial projections of business proposals. Very often the VC already has a strong background understanding in their niche selected market and will still research further for things such as market sizing, competitors and their USP. Ultimately, VCs still prioritise the founding team both expertise and experience, product and service provided before lastly looking at financials. Therefore VCs going into the specific number projections are usually keen to invest to a certain extent already.

The importance of ROI however is v important. I would recommend reading this as it explains the math very well https://hackernoon.com/vc-math-2848971a34a0.

A summarised explaination: Based off Pareto Principle aka 80-20 rule, your returns are likely uneven and to come from the top 20% of portfolio companies. Therefore to hit their expected return to investors, VC funds must invest in a portfolio consisiting of more companies giving exceptionally higher multiple of returns for the law of numbers to work. And as the article states, there has been cases the author has rejected companies simply because they do not offer high enough promised returns, not because their business model or projections are poor.

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