We’re new school.
I joined the venture capital industry around a year ago, as an analyst at Quidnet Ventures. I’ve found that QV seeks to fund environmentally-and-future-conscious-companies, companies focused on disruption for good. As such, we take a long-term and layered approach for success; we don’t look to simply extract value by finding companies that provide a high IRR.
We think differently than some of our counterparts in the U.S., and we’re in good company in N.Z. New Zealand is exploding with new start-ups and funds that are thinking about a secure future. We’re building something new, and special. And in light of that, we’re going to myth-bust a few “old-school” assumptions about venture capital while we’re at it. Hopefully, this will be helpful for emerging funds and businesses.
Assumption #1: Seed $ is easy to find
A company that has just started out might think, “I have a good idea; someone – even a few people – will give me $10K for this idea.” That may be true – in the right circumstances. Not everyone with good ideas has access to seed money. This is due to at least two reasons:
Systemic factors: Access to seed money may be locked away at universities, where tuition money and a set of biased admission standards act as gates; or among colleagues at prestigious employers, where biased hiring standards act as gates; or in particular urban centers, where long commutes to these urban centers act as gates.
Selection bias: VCs can tend to fund people like them. We tend to gravitate toward people like us, which can preclude us from good ideas belonging to people NOT like us. This isn’t good for overall innovation.
A combination of these problems disallows great ideas from reaching the greater public. A number of entrepreneurs rely on safety nets: friends, family connections, etc. The best ideas can be lost, just because someone doesn’t have the ‘right’ connections.
We believe better access to early-stage funding is necessary, and we’re looking for ways to make that happen. We’re involved with various universities in NZ, the US and the UK, big and small, connecting good ideas with the right people. And we do our best to listen to everyone: people who cold email, people who are referred.
We give extra attention to meeting with and listening to typically under-represented founders: Māori founders (people indigenous to New Zealand), female founders and Pasifika founders. We seek to give these groups equal opportunities to share good ideas with the right people.
Assumption #2: Funds should follow the Power Law
What is the Power Law? Fund a bunch of companies – most will be losers, some will be winners, and one or two will take you to the top. (This, of course, is not the technical definition of the Power Law.)
We don’t invest in companies assuming that most will be losers, some will be winners and one or two will take us to the top. We prefer a more level approach, looking for strong businesses in their respective sectors, assuming that, with proper choices and due diligence, our portfolio will net positive, with robust multiples.
As Oliver Libby writes on CrunchBase, “This works for some funds. But this is no way for the entire sector to work. There are multiple versions of success within entrepreneurship. In my experience, if you can turn a $1 million investment into a $5 million investment, it’s a good day. If you do this consistently, you can build an excellent portfolio across the board, without any unicorns.”
We agree. While we definitely wouldn’t fret if one or some of our companies became unicorns, we believe that a business’s success can mean becoming a community-recognized business with a healthy profit and good intentions. We believe those kinds of companies make the world better, and certainly keep our fund on the incline.
Libby writes, “Does this sound boring? If it does, that’s okay. While this tactic might not get you regular cover stories in Forbes, it’s a necessary shift for the industry. VC as a sector cannot rely only on the companies making splashy headlines to be successful.”
Assumption #3: Funds and companies should look for the “It” factor in founders
Libby writes, "The myth of the charismatic genius is dying out. Now, the most successful VCs in the industry are those who understand that even the strongest founders need support from their teams.”
We like entrepreneurs who are reasonable, and come to us armed with data and a strong team. And we don’t judge by age, race, sexual orientation, etc. We like entrepreneurs who can be coached, and are nimble: iterations of the business model, marketing/messaging, etc., will happen. You don’t have to be a “charismatic genius;” just a reasonable person with a good idea and a great team.
Conclusion
The ‘unsexy’ way can very well be the most successful way.
Read more:
The Economist’s podcast - Editor’s Picks: November 29th 2021
Author: Skye Grayson, May 16, 2022