Notes on attaining a VC Mindset
By: Aman Aggarwal
Tags: Investment, Book Summary, Notes, Venture Capital, Lessons Learned

I was suggested a reading on “Venture Capital Mindset” by George Renata. As someone who has been pondering about making a career in the world of Venture Capital, my curiosity found the book to be satisfactory and informative.

What follows are my favorite lessons from the book

Understand what a Venture Capitalist does:

Often, Private Equity, and Venture Capital are used interchangeably but as someone who wants to enter the industry, one should be clear with the strategies. The lines between a PE and VC firm can, quite often, appear to be blurry as there are a number of similarities between the two — they both raise capital from Limited Partners, attempt to invest low and sell high the private companies they invest into, are a part of ‘alternative asset’ class due to illiquidity, and mostly use legal contracts of the same structure. But they still are fundamentally different in the way they try to generate value.

Write down the motivations:

Road to becoming a successful Venture Capitalist is long and frequently you’ll ask yourself “Why did I choose this road in the first place?”. Writing down one’s motivations is a great way to teach oneself to commit to something. Law of Repetitions is a thing and works charmingly against our limiting beliefs. Some are given below as examples.

“Measuring and improving social impacts” — Marc J. Epstein, Kristi Yuthas

Identity Returns are the direct, personal reflections on identity of individuals or the organization making the investments. Process Returns flow from engagement in a project.

Define your Goals

The mission/aim/purpose/vision is a statement that talks about the present leading into the future. It requires one asking oneself questions like “Where do I want to be in the next 2/5/10 years?”, “How will I get there”, “What is the Benefit?”, “Why do I want to go there?”.

Find Yourself as a Venture Investor

Create an Investor Profile, this would mean selecting your preferred industries/sectors, geography, and the stage of the company’s lifecycle you’d prefer to invest at, the type of support you can provide the portfolio companies with, the type of entrepreneurs and the products/services you’d like to back. This will allow job interviews to go smoother and provide a basis to start with when asked questions like “Why do you want to become a Venture Investor”.

Understand the Hierarchy in the Firm:

Though VCs usually differ in how they’re structured on factors like size or stage at which they invest, the standard template goes like this:

Partner Level — General or Managing Partner, Junior partner or Principal (essentially a partner in training and the right hand of Partner), Functional Partner (usually operating in a specific functional role like Marketing, Hiring, etc.), Venture Partner

Junior Level — Intern, Analyst or Venture Fellow, Associate.

Often, for junior/entry levels, firms may have a pre-MBA role, which means that the firm is looking for a candidate for a 2–3 year contact post which the candidate can move on to business school or join another employer.

Learn to apply Systems Thinking

Given how VC as an industry and practice tends to be chaotic, unstructured, and constantly changing, Systems thinking is a concept that can help explain how different parts of a system work together. The three main components of any system are the elements, their interconnections, and their function/purpose. Everything can be seen as a system on its own, and that system can also be seen as an element of a super system. When evaluating a startup, think of it as a system, with its product and the team as elements. When put into the market context, the startup becomes an element interconnected with the other businesses, which as a result of other elements — affects and gets affected by other elements. While evaluating, an investor puts significant focus on how the start-up will interact with the other businesses in the portfolio of the firm. (further reading: “Thinking in Systems, A Primer” by Donella Meadows)

Learn how to pick out targets:

One thing that’s common between every VC firm is that they’ve all had failures. Failure is a part of the venture capital game, but it shouldn’t be tolerated. Successful exits from a few high impactful companies can far outweigh the losses due to a few failures. As a player in this game, you should be asking yourself “What if this works?” “What are the chances of them winning?” “How will it impact the portfolio?”. If a VC firm invests in 10 start-ups, 8 can be expected to fail, one breaks-even, and the successful one pays for the rest.

The venture capitalist is looking at early-stage companies that don’t have a history, and sometimes not even a product. Every firm has its own unique factors and their weightage in final decision making to assess a target. A study by the National Bureau of economic research revealed a number of approaches regarding the assessment of target companies by studying 681 US VC firms. Learning how to use which factor to use and how to rank them is crucial.