What Investors Can Teach Entrepreneurs

This article explores the benefits and drawbacks of an individual's experience in venture capital as it relates to building a startup. While the time spent in venture capital can provide valuable knowledge, it primarily provides high-level insights and does not necessarily equip entrepreneurs with the tactical skills needed for running a company.

Benefits of Venture Capital Experience

Having an understanding of venture capital can benefit entrepreneurs in several ways. It helps navigate information asymmetries, providing insights into areas like fundraising, selling a company, and recruiting executives. Even though not all roles in venture capital firms involve direct deal-making, the exposure to the process and the understanding of the levers involved can be beneficial.

• It helps with traditional investor/entrepreneur information asymmetries
• Helps with understanding of investor motivations, which can otherwise appear mysterious
• Exposure to the deal-making process and the levers involved, even without direct deal-making experience.

Limitations of Venture Capital Experience

While venture capital experience can be helpful, it also has limitations. One significant area where it falls short is in the tactical details of running a company, particularly in hiring and managing teams. Venture capitalists often talk about strong teams, but they do not experience the challenges of finding the right people.

• Lots of tactical holes still exist
• Investors can often oversimplify startup issues, or overmatch on patterns

The Challenges of Hiring and Managing Teams

Hiring and managing a team is one of the most difficult aspects of running a startup. Venture capital experience does not equip entrepreneurs with the skills to build a strong recruiting pipeline or conduct effective interviews.

• Hiring T-shaped people versus specialists
• Try to get doers
• More candidate flow solves a lot of problems
• Interview for the actual work you’ll be doing, not skillset trivia
• Raw intelligence is just one factor – don’t overestimate it

The Oversimplification of Startup Issues

Venture capitalists often spread their time across a wide range of industries, which can lead to oversimplification of startup issues. They may draw false conclusions about companies based on patterns they observe, lacking the deep understanding that comes from focusing on a single company for years.

Understanding Investor Motivations

A venture capital background helps entrepreneurs understand the motivations of investors. This knowledge is crucial for addressing common questions like why investors might not be interested in a profitable idea or why a high-valued startup might lose money. Understanding investor motivations, including the 1-in-10 portfolio strategy and the relationship with Limited Partners, can help entrepreneurs align their business plans with investor expectations.

The Venture Capital Model

The venture capital model emphasizes building high-growth companies, not medium-sized profitable businesses. Knowing this can help entrepreneurs make their business plans more attractive to investors and align their decisions on financing events, exits, and team building with the venture capital model.

Conclusion

Venture capital experience can be a valuable asset for entrepreneurs, offering insights into investor motivations and the deal-making process. However, it is important to be aware of its limitations, particularly in areas like hiring and managing teams. By understanding both the benefits and drawbacks of venture capital experience, entrepreneurs can navigate the challenges of building a successful company.