Venture Capital is an interesting business. My friends ask me questions like ‘what is VC’, ‘what do VCs do all day’, so I set out to simplify VC into its core elements.
VC in an interesting mix of PR, company building, finance, legal, fundraising, investor management, operations, marketing, people management, human relations, etc.
However everything boils down to four core pillars, and it should be noted, that they are interrelated:
1. Deal Flow - deal flow is the most important aspect of venture capital. It can be thought of as everything that goes into the top of the investment funnel. If you don’t fill the top of the funnel with great deals, you have no chance of investing in great companies - you are only as good as the deals you see. Although many things go into getting great deal flow, the very best way is by building a great reputation among entrepreneurs you have worked with. VCs such as USV, FRC and IA Ventures have done a great job at this in recent years. Word-of-mouth has always been the best form of marketing.
2. Investment Decisions - if you have good deal flow, then there is no shortage of good deals to choose from. But good deals don’t return funds, great deals do. If deal flow is everything that is added to the top of the funnel, then making an investment decision is the process of selecting the few deals that make it.
3. Post-Investment Support - every VC should spend as much time as they can helping their existing investments. Current investments should always be more important than the investment you are about to make. Startups are risky, and it’s the job of a good VC to do everything they can to de-risk an investment and help the founders build a big company.
4. Limited Partner Management - VCs are money managers who just happen to have company building skills. The money they are managing comes from LPs, or Limited Partners. LPs range from individuals, to family offices, to endowments, and even to corporations, such as the case at Google Ventures or Intel Capital. Managing these LPs is one of the least visible aspects of VC, but it’s an unavoidable aspect of the business.
Venture Capital is a mix of many skills and industries. I believe this is the reason there are so many different types of people in VC. Although this may cause confusion for outsiders looking in, the good news is that entrepreneurs get a wide variety of people in which to choose from. As the VC industry continues to evolve, change is certain, but I believe the four pillars above are here to stay.