Venture capital learnings: 23 Things I’ve Learned as a VC

Taylor Davidson, a former VC wrote an epic blog on his venture capital learnings from his years grinding. It is a pretty epic post. Whilst dense, there really are super learnings in almost every line. I took some time so condense and highlight the points which resonated with me. Highly recommended reading.

The 23 VC learnings

1) Back theses, not product visions.

Josh Miller explains it as such:

… early-stage investors should be looking for entrepreneurs who are thesis-driven and implementation-agnostic.

• Markets have an indelible impact on the opportunities and available paths for startups
• Product visions and paths will change as an entrepreneur builds experience in a space
• People’s ability to create and execute on a thesis in a market was what determined success

He has two good heuristics

• “bad market beats great team”
• “bet on technology risks, not market risks

Instead of asking about product learnt about an entrepreneur’s thesis on how the world is evolving and what people need… look closer at the people and how they came to their theses, rather than the specific product vision they were able to articulate at the moment.

2) Build investment theses, invest in people.

A common consideration for VCs is whether they want to be thesis-driven or more opportunistic, i.e. do they want to create a thesis about how the world will evolve and then invest in companies building towards that, or do they want to be opportunistic around trends and just focus on backing great entrepreneurs?

Theses matter to the extent that it determines the markets you choose to invest in and the people you work with. After that, it’s all about people.

3) Timing matters.

It took me awhile to understand and fully embrace how important timing is to investing: critical for a startup to understand why right now is the time for a particular business or technology to succeed, and also critical for dealmaking.

Why now? Timing, the sense of why something matters right now, is important, but is matched with pace, the sense of how fast markets, companies, technologies, and people are moving.

4) Be clear in how you define “great” entrepreneurs and teams.

“we look for, back, and support great entrepreneurs building great teams”… what does “great” mean?

A great entrepreneur is someone with a unique, differentiated reason to be better at executing this business, in this market, with their team, than anyone else, an inner capacity and ability to build a great company.

5) Listen first, listen always.

Telling entrepreneurs what to do may feel great, but it’s more important and valuable (to both entrepreneurs and VCs) to listen first, talk second. Listen before you talk. If you don’t listen, you don’t learn.

6) Become intimately aware of your biases.

Biases, heuristics, patterns, and stereotypes are all ways to describe how we use past information, experiences and observations to process new information. They are natural, as it’s impossible for the mind to process all past and present information to make brand-new decisions, so we have to store the results of some decision processes in our memory to call on in the future.

VCs have inherent biases when seeing new information, when meeting new entrepreneurs, when looking at new markets, when testing new products. Pattern matching is important, but we can’t be beholden to the patterns we’ve developed.

7) Lean into what you don’t understand.

Don’t discard what you don’t understand. The most interesting and valuable ideas tap into emergent user behaviors that we won’t understand at first .

Emergent behaviors only make sense in retrospect.

8) Ask dumb questions.

Don’t let your intellectual ego stop you from asking your dumb questions; dumb questions can be good questions. Question can open up new avenues and new patterns in ways you wouldn’t have immediately recognized. You don’t have to know the answers, but you do have to know the questions. And you have to know how to understand and synthesize what you hear so you can give good feedback.

9) Make time to learn.

VCs need to believe in things others don’t, take the time to learn what you believe and why you believe it. You have to spend the time to develop the ideas and grounded, unique perspectives that can differentiate you as an investor. Leave open space on your calendar, just like your mind.

10) Form your own opinion.

It’s important to decouple interpersonal loneliness from intellectual loneliness. It can differ by firm, but interpersonal loneliness is something inherent to the job that you can combat by building networks with entrepreneurs, partners, investors, press, and great people. Intellectual loneliness is what allows you to develop non-consensus viewpoints and investments. Pursue things you think are interesting, not just things everybody thinks is interesting. And being intellectually lonely is a precursor to making non-consensus investment decisions. Don’t just form an opinion, form your opinion.

11) Bias for curiosity, friction, and serendipity.

Take odd meetings to create serendipity. Reach out cold to people doing things you find interesting. Be willing to be wrong. Test, try, and learn. When I see or read about something interesting, I don’t just read the news article about it: I research the people behind it, find their email or Twitter, and send them a note to tell them I thought it was interesting. I made a lot of great connections over the years by reaching out and saying hello.

12) The intellectual side of meeting and evaluating big, new ideas is fun and interesting, but VC is won and lost on more than intellect.

There’s a lot more that goes into VC than the investments, that there’s a lot of context behind an investment that the public will never see, that deciding on investments is far harder and more meaningful than analyzing ideas, and that figuring out where valuable companies are going to be built and then actually positioning yourself to invest in them are related, but ultimately separate things.

The lesson here is that venture capital is less about identifying great investment opportunities and is far more about getting access to those opportunities. Knowing that this handful of companies would become interesting in 2010 is not what makes a great VC. It’s convincing the entrepreneurs in all these companies to partner with you on their journey; that’s the battle.

13) Uncertainty is a feature, not a bug.

Uncertainty is what provides you the opportunity to make the non-consensus decisions required for outsized returns. Marc Andreessen explained the process as:

“We think you can draw a 2×2 matrix for venture capital. …And on one axis you could say, consensus versus non-consensus. And on the other axis you can say, successful or failure. And of course, you make all your money on successful and non-consensus. … it’s very hard to make money on successful and consensus. Because if something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate ‘non-consensus’: in sort of practical terms, it translates to crazy. You are investing in things that look like they are just nuts.”

14) Entrepreneurs are more important than VCs.

Don’t waste an entrepreneur’s time. Be prepared. Be present. Be on time. Follow-through. Check your ego. Call out your biases. Mentor, don’t preach. Know when you can give advice, but also know when you can’t. Allocate success (and failure) appropriately.

15) Be clear in your decision process.

• If it’s a no, say no.
• When I say no, I make a point to say why.
• If it’s a no, be open to talking again in the future.

It’s important to define your process, communicate it with entrepreneurs, and do what you say you will. Being clear, constructive, and being open to having conversations about decisions helped me build productive, closer relationships with entrepreneurs.

16) “What do we believe without question that will be proven mistaken in the future?”

Peter Thiel famously asks entrepreneurs:

“What is something you believe that nearly no one agrees with you on?”

That’s why I hold the thought question “What do we believe without question that will be proven mistaken in the future?” in my mind as a reminder to always look for innovation and be open to changing my mind. “Strong opinions, weakly held.”

17) “To know what you think, write it down.”

“To know what you think, write it down” is true. Writing about a topic is how I force myself to develop and express a viewpoint on a topic that I’m curious about or need to know.

18) Focus on trendlines, invest in step-changes.

Bill Clinton used a quote in his closing speech at CGI 2013:

Focus on trendlines, not headlines.

At the core is the thought that behind the immediate headlines are often years, even decades, of hard work with little recognition, and that you have to build the trendlines to get the headlines. Predicting that a change will happen in “3-5 years” is easy, but it’s more rewarding to think about what events will create the changes. Step-change events signal investment opportunities that lead to exponential growth, rather than trendline growth, and provide the foundation for outsized returns.

19) In the short-run, judge a VC by how they play the game; in the long-run, judge a VC by their successes, not their failures.

A good exit isn’t necessarily proof for a good investment decision (and vice versa). (link)

If there are about 200 startups each year fundable by top VCs and 15 companies that will generate 95% of all economic returns, that means that we’ll invest in a lot of companies that fail. It’s more important to invest in a winner than to have a high average of successes. It takes quantity to get to quality, and you have to make a lot of investments (and fund a lot of failures) to find winners. The required sports analogy: judge a VC by slugging percentage, not batting average.

20) Know how you can uniquely best help your investments succeed, and execute on that.

Early-stage investing is drastically different than late-stage investing. Lead investing is different than follow investing. Angel investing is different than Series A investing. Know the game you’re playing and understand how expectations and rules change, and build your knowledge, relationships, and skillsets accordingly. And it’s true: networks, relationships, and the ability to help entrepreneurs succeed through connecting them to solve needs are the keys to building a successful career in the space. How you are able to leverage your experiences and expertise to support your portfolio will define your reputation with entrepreneurs. Be clear about how you can help an entrepreneur upfront and build that relationship from the beginning. Reactive, sporadic support is less valuable than proactive, consistent support. Build clear lines of communication. Leverage platforms and tools and define clear ways to provide value-add to do more than the semi-regular and reactive “catch-up”. ⁵

21) Doing the right deals is more important than doing the best deals.

In practical terms, valuation should be looked at only around the context of financing, i.e. the price an investor paid to invest capital into the business, and not a market-clearing determination of a company’s value compared to other private or public companies. But even for VCs executing deals, price matters only to a degree. Price is determined a mixture of a company’s performance and the broader market climate for comparable investment opportunities. And while it’s generally beneficial for an investor to invest at a lower valuation than a higher valuation, even that only matters to a degree. While the economic returns of VCs fit a power law distribution, the results of startups largely fit a binomial distribution: they succeed or they fail. If the startup succeeds, the valuation of an early round likely has very little impact on the financial returns of the investment; and if it fails, then a zero is a zero regardless of the price you paid.

22) Disrupt, or be disrupted.

Recognize that the market between entrepreneurs and VCs has traditionally suffered from information asymmetry: The market for venture capital is trending towards being more transparent, more participatory, and more efficient. Venture capital is being disrupted, because the game isn’t the same it used to be, and it won’t be the same in the future.

23) Do the hard work.

It takes a long time to succeed in venture capital, as it takes a long time for relationships to build, for companies to mature and exits to occur, for hard work to pay off. Think long-term. Don’t go for “hot” deals just because they are hot. Know how you’re different from other VCs, and continue to evolve and build your value-add. Know why you’re backing the entrepreneurs and companies you’re backing. Be honest, intellectually and interpersonally. Make the time to build long-term, meaningful relationships. It takes a long time to realize returns; as Mark Suster explained:

But the truth is only time will tell whether I’m financially a successful VC… Any VC 3 years in saying otherwise would either be exaggerating, lucky or an extreme outlier.