Recently, we stumbled upon an incredible article, on why family offices may not be ensuing a resourceful & astute approach, when they are investing in venture asset class.
Our observations in this direction are as follows:
“ Venture Playbook is fairly ambitious; not very easy to execute”
It requires a serious time commitment which is of paramount importance throughout.
While at the outset, it calls for creating and regulating a strong dealflow, it's basic demand is to formulate a systematic deeper network with the entrepreneurs at all times. It necessitates developing a relationship with several partners like co-investors, lawyers, subject matter experts , bankers etc. And a good amount of time has to be rightfully spared for assisting and helping the portfolio companies.
It is a universally known and accepted fact that, to be a 'Top Dog', you need to be on a cap table of a company with great Founding team. However, Investors rarely, scrutinise or probe, why they deserve their seat on the cap table.
It is important to be intuitive at times but it is extremely important to feel the pulse, to be alert, informed at all times; thus, one should ask, have you build a relationship where Founders deliberate their innate problems with you or do they display an expression of 'no concern'. You should also be geared up to assess if your network is fervently assisting them to progress & thrive despite an adverse environment?
“ Adverse deal selection is a reality”
Given a choice, the Founding team will always reach out to an Investor with larger ticket size and better brand! Have you ever wondered why you are receiving the deal-flow you have. Are you oblivious to adverse deal selection that you are facing? Are your benchmarks for selection too mediocre or too low?
You should also ask yourself if you are trying to abstain from associated anxiety, stress, hassles of being a VC and are just desiring a lot of fun. To be honest, VC investing can be extremely mundane and uneventful.
Most of the family offices feel because they understand business, they will be able to identify great startups! But one need to understand the asset class really well. For example, do you think 30% IRR in a deal is a great return! Well, it doesn't at all cut the grade in the VC world, consider the mortality rate and math may only start working at a 50% exit IRR. So, a goal set too low would be like hitting your own leg before you even start the race.
“ Time is your only asset”
And you must ask yourself, if you are investing it at the right place! In general an average exit in a VC investment happens in 5-7 years. So you should be asking yourself if you are investing adequate time with the portfolio companies. Are you expecting returns before this time frame, if yes then you are in for a big disappointment.
When it comes to sourcing, one needs to build a quality deal flow. Engaging in a few events doesn’t make a difference because building a network is a perpetual effort. One is never gifted with a great deal-flow, you have to establish your sourcing and then continuously improvise upon it.
You have to be present at right geographical locations. Entrepreneurial ecosystems are built-in hubs where talent and capital comes together. You just can’t be away from where the real action is and try to make a dent in the VC world!
“ It is a damn full-time role”
Personally, I feel, venture investing is a nascent asset class and it has to be approached the right way. If you are making a part time effort then you need to pause and introspect!