February 25, 2013 by Speakers' Spotlight
4 Things Nobody Told Me Before I Started a Venture Capital Firm
Award-winning entrepreneur and creativity expert Josh Linkner writing for Forbes.com:
When I closed out 2010, I realized I had embarked on one of my craziest journeys to date: that November, I started a venture capital firm. Now in its “terrible twos,” Detroit Venture Partners has grown to seven employees, plus three partners (including me, the firm’s managing partner). We’ve invested in 17 companies, generated more than 150 jobs, and made a noticeable impact in the technology epicenter of downtown Detroit’s urban core. Not bad for two years. However, there have been a series of growing pains; lots of potholes could have been dodged with a few tidbits of advice. The same is true for any business – before starting, find out from industry leaders what they wish someone would have told them before they started out. Here’s my list from starting our VC firm. What’s yours?
Business decisions are not based around finance. Instead, we look much more for the “special sauce.” What’s truly going to set a company apart from the ruthless competition? We rely heavily on character judgment – in the first 30 minutes of meeting someone, we have to be convinced that he or she is capable of leading a company to greatness, over countless hurdles sure to cross the way. In similar fashion, is the product really an innovation, making a company a “category of one,” or is it just a “me-too” player? If it’s the latter, we’re not interested. In framing a contextual decision, we analyze the market trends; how viable is this company in today’s marketplace, in this realm? Once a leader and her team’s vision pass this first round of tests and we peel the onion back on their pitch, only then do we assess the financial factors to determine whether we’ll fund.
VCs still have customers. When you open a restaurant, everyone’s main concern is how you as the owner will be able to get customers through your doors to pack the house. No different with a pipeline of clients for a hair salon, or potential shoppers for a clothing line. I sort of figured with a large checkbook at the ready, potential customers (eager startups) would flock to us like teenage girls waiting for the new Taylor Swift album. Not so much. Just like a new restaurant owner, new VCs have to be proactive in sourcing quality deals and keeping a strong pipeline, ensuring a consistent deal flow to maintain appropriate investment pace. Marketing, public relations, and social media are not to be ignored, even in a seemingly “stuffy” category.
Partners should be approachable. Startup leaders are encouraged to approach our staff with all their news, the best and the worst kind. In similar fashion, hopeful startup leaders going through the diligence process will come in contact with all members of the VC firm they’re courting. However, there’s a perception from these entrepreneurs (as I’d call them, “Streetfighters”) that the partners aren’t available or accessible. Instead, they turn to the analyst or associates, who, while immensely valuable to firms, might not be equipped to answer a CEO’s toughest questions, leader to leader. Because of this, partners shouldn’t be at the golf course or always at the desk with the door closed: open communication starts in the corner office.
Raising money is just as difficult for VCs as it is for the startups we fund. In order to run a successful fund, a venture firm must have a healthy supply of limited partners, who all sign on board to allow us to invest their money as we deem best. This is no different than a startup trying to fill out a funding round – these companies are sourcing backers willing to take a chance on their expertise and vision. The two scenarios present the same challenge, and both cases are incredibly hard. Don’t underestimate either one; both should be taken seriously and given the credence they deserve.
Whether you’re starting a venture capital firm or embarking on a different sort of an adventure, make sure you get all the advice you can handle before diving in. Even when you do, you’ll have a list of things you wished someone had told you (as I do now). Remember, pay it forward and share your wisdom – someone will be thankful you did.
From Forbes.com, February 22, 2013