Three Not So Obvious Learnings from 8 Years in VC

Around this time 8 years ago, I joined Spark Capital and started this chapter of my career in Venture Capital.  About three years later, I started NextView with Dave and Lee.  I knew very little about VC when I started, and as the old adage goes, the more I learn, the more I realize I don’t know.

8 years is a decent about of time, and it’s been an interesting period. We had the tail end of Web 2.0, probably one of the biggest economic collapse I’ll see in my lifetime, and the current bull-market in tech and startups.  But I’m still relatively new to the industry so I have a ton more to learn every day.

As Tim Devane joined us recently, we’ve been talking a bit about lessons learned, and I’ve been thinking back a bit more on the non-obvious discoveries I’ve had since I entered this industry. really obvious stuff is re-hashed a lot in VC blogs, and I’ve shared a bunch of those over the years.  But on my walk to work today, I thought of three, less obvious realizations I’ve made that I think are pretty important for me and are shaping my thinking these days.  They may be obvious to some, but it took a while for these to sink in for me.

1. Invest in people who are different.  

In particular, I think there is a strong bias for some investors to try to invest in people who are similar to them.  People who have similar backgrounds, think in a similar sort of way, or have similar strengths.  Even if it’s not as obvious as this, I think most investors like the idea of investing in people that they feel they “like” or can have pretty deep rapport with.

I think this is pretty limiting. Of course, life is short, and so there is some minimal level of connection with a founder that is probably important to have an effective, collaborative relationship.  But great founders are often quirky and extreme in some ways, probably to the point that it makes me feel unsettled from time to time.  That’s ok… and it’s probably preferred. You can have a great, collaborative relationship with someone who is very different from you.  And you’ll learn a lot more from them as well.

2. Market size is overrated and can lead to lazy thinking

I’ve blogged about this quite a bit, but I think more and more about it these days. Market size or size of a potential outcome is the main reason why VC’s pass on an investment. It’s also super easy to pass for this reason to the point that one can be very intellectually lazy.  It’s also a reasonably useless thing to think about in companies that are creating new markets.

Really, when one passes on an investment due to market size, it isn’t about market-size in actuality. It’s more “do I really believe that lots and lots of people will do this?”  When you remove major barriers of friction and cost, or add new benefits to a product or service, demand will change big time, and that’s what I should be thinking about when thinking about market potential.

Increasingly, I’m trying to suspend disbelief around market size for as long as I can, and focus much more on 1) is this something people want and 2) can this grow really fast.  I’d say close to 100% of my missed opportunities in venture were missed because I misunderstood market size.

2 (b). Market size is overrated, but customer engagement is not

I don’t have time to write more about this right now. But while market size is overrated, having a small but highly engaged group of customers shows that something magical is working and worth paying attention to.  And services with tons of top line growth and weak engagement is dangerous.

3. The VC industry moves slowly, but fast enough for you to miss it

I find that the VC industry changes slow enough for you to not notice, but fast enough such that it’s possible to be left behind. Since I started in venture, there have been some interesting shifts. For example:

  • All VC’s wanted 20% ownership. It was strangely very set in stone. I think this has relaxed quite a bit, and there is the realization that 20% isn’t what’s magical, it’s ownership relative to fund size
  • Seed funds and micro-VC funds didn’t really exist. Institutional seed rounds were not a commonplace just yet.
  • VC’s didn’t want to invest in consumer products, consumer devices, etc. They did like cleantech.
  • Fundraising platforms didn’t exist
  • Late stage investing didn’t seem that a very good idea
  • VC’s didn’t have platform teams, were much less transparent, etc

Things change quite a bit, If you don’t evolve, you can be left behind. If you miss the boat, it’s not that easy to recover (there are VC firms that either don’t exist or have lost ground big-time because of this).  But the change isn’t very fast, and the feedback loop is pretty long, so one can be lulled into a false sense of security pretty easily.

These were the three that came to mind, but there are probably 5 more that I’ll think about in the next week. I’m curious what some other folks have discovered over time, or if anyone disagrees strongly with these.  I have a lot more to learn!

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