Last summer, I worked at Bloomberg Beta, an early-stage venture capital (VC) fund backed by Bloomberg L.P. with offices in New York and San Francisco. I spent my summer trying to absorb as much about the venture capital world as I could. A year and another trip to Silicon Valley later, I decided to share some of my observations more widely because of the sheer amount of interest voiced by people from all walks of life.
I came into VC with a graduate degree in economics, some exposure to financial markets and a deep interest in tech. However, I had never heard of a “term sheet” or a “vesting schedule.” For anyone who is in a similar situation and interested in finding out more, I hope that sharing some of my key insights will be of use. In this post, I focus on the type of skills that I believe make a great (early-stage) VC.
- The primary skill is business acumen
This may be stating the obvious, and yet I think it is important because I found the most valuable type of business intuition slightly different from what I expected.
In essence, a venture capitalist places bets on the future (just like anyone else who manages some kind of asset). When a VC partner considers a certain startup for investment, the question to ask is, in the words of Bloomberg Beta’s Roy Bahat,
“What is the bet that I am taking if I were to invest in this business, and is this a bet that I’m willing to take”.
To do this well, the investor needs to be able to assess both general business trends (i.e. the market and customers), the competition (is someone else out there who can do this better, or faster?) and the startup (its product, the quality of its team, whether the founders can deliver on their vision). Timing also matters — VCs love to talk about product-market fit. One aspect is whether the market is “ripe” when the product goes to market. A famous example of a startup that failed the last test was General Magic, which tried to create a portable connected device similar to today’s iPhone in the early 1990s, before the commercialization of the internet.
Because business acumen helps when assessing the potential of a startup, most successful VC partners have founded companies before or spent many years at startups or tech firms (particularly in later-stage funds, experience in PE or tech investment banking is also valuable). The business knowledge learnt at such places can differ quite substantially from the skills that are acquired at larger companies, where structures and processes are more clearly defined. VC partners have seen countless businesses fail and some succeed, and have learnt how past successes, failures or technology trends may (or may not) be relevant for today’s world. Transformations that take place within larger companies are often slower than what happens in today’s tech world, and can be successful without the innovative or “out-of-the-box” solutions of high-growth startups because committed clients and cash are more abundant.
- Early-stage VCs have little “data” to work with
One reason why business intuition is so important for early-stage venture capitalists is because there is so little data to inform investment decisions. Early-stage companies barely have any track record (which is why the founders’ track records often serve as proxies), their product is still in the development phase, and direct competitors, if they exist, are often themselves in early stages. Given this lack of data, there is limited due diligence that VCs can conduct. As a result, business acumen and foresight, as well as the ability to assess people’s abilities, are crucial skills. People who thrive in this environment are not afraid of a lack of “hard” data.
- Org structures in early-stage VC funds are less pyramidical
The scarcity of relevant data also means that early-stage venture capitalists usually don’t spend as much time doing traditional “research” work compared to later-stage VCs or other types of investors (for example PE investors). As a result, early-stage VC funds often don’t employ a large base of analysts or associates to “do the grunt work.” Much of the work falls on the VC partners; calling up references or mentoring founders are such central tasks to the investment process that are rarely handed to less senior members of an early-stage investment team.
- Good VCs have empathy
After investing in a company, most VCs take a (more or less) active role in the development of their portfolio company. This ranges from mentorship to more direct control through board memberships. Based on my observations, VCs with empathy usually add more value than those without. Understanding what it’s like to start a company and adapting support and mentorship to the specific situation of the portfolio company play a crucial role. After all, growing a company is hard and involves making a series of decisions in a highly uncertain environment that come with significant trade-offs. Good mentors listen to the founders and ask the right questions to help them understand their challenges and find possible solutions. Previous founders often find this easier, which is one reason why good VCs often have experience founding their own businesses.
- Networks matter!
Perhaps the most intriguing observation of my time at Bloomberg Beta was the ubiquity of networks and reputation effects. I learnt that networks matter on all sides of the equation — for founders, VCs and job applicants. Most VCs only meet with founders who were referred to them. For those looking to work in VC, getting a job without an introduction can also be difficult.
There are probably a few (related) reasons for the importance of networks. First, VCs compete for the best startups and thus need to make sure they have a strong pipeline. Second, founders want to be funded by the best VCs who can help them scale (for example by connecting them to experts, later-stage VCs or simply providing a signal for the company’s potential). And third, given the lack of “hard data” in early-stage investing, referrals, particularly from those in the same network, carry a lot of weight (note that this goes both ways — founders often call references of VC partners before they decide which checks they want to collect).
Because network and reputation effects play such a central role, many VC partners spend significant time expanding their network. Public appearances at technology conferences and an active online presence help VCs build a reputation and become established in an increasingly competitive industry.
- The VC world is fast-paced but requires a long-term mindset
VC is a fast-paced world because investors need to be ahead of the curve to hear about promising startups before everyone else does. Investment decisions are, particularly for early-stage investors, usually made in a short time-frame (and, as said before, with little “hard” evidence). Investors often hear hundreds of pitches a year and need to be quite confident in their beliefs about a startup after a short meeting with the founders because any follow-up work is costly, but could yet be crucial if the startup becomes successful. And even for those startups that an investor follows up with, the time frame to the investment can be short when VCs compete to fill a funding round.
Despite the fast decision-making, the time frame for VC investors is long. Most funds are invested on a 5–10 year horizon. Thus, investors have to think about the longer term chances of a company succeeding. I found this one of the most exciting features of the job — thinking about what the world might look like in 5, 10 or even 20 years.
It goes without saying that these six skills are by no means exhaustive, sufficient or necessary — most successful VCs probably have some unique quirk that help them find and invest in the best companies. Nonetheless, there seem to be common threads among VC partners. Therefore, I hope that these six lessons are valuable guidance for anyone who is interested in venture capital.
I want to thank everyone at Bloomberg Beta for helping me understand how the VC industry works. I was impressed by the team’s intellect and founders-first philosophy.
For anyone interested in a more technical and more exhaustive introduction to venture investing, I recommend Brad Feld’s book “Venture Deals”. The book explains the financials and deal structures as well as the operations of a VC fund. I also advise taking a look at Bloomberg Beta‘s reading list for references to other topics that are relevant for venture investing.
Friederike Reuter (Germany & Lincoln 2015) studied economics at Oxford and Harvard. She currently works at the Boston Consulting Group, where she supports organizations develop strategies to implement artificial intelligence at scale. The views expressed in this blog are hers alone and do not reflect the views of her employer.
This article first appeared on Medium, 17 September 2018.