Why Become A VC Investor?
There are a handful of reasons why people want to become VC investors. Some love innovation, technology and enjoy thinking about new business models and helping scale the next big thing. Another reason could be that they are just independently wealthy and need something to do, so they invest some of that capital into startups or funds. No matter what kind of motivation you have, to truly enjoy the money game and the balance of risk and return, there are three hard missions to conquer.
Return 100% of the principal
It is surprising and scary that only 25% of GPs and venture capital ever received a carry, which means most of the VC funds are not able to return 100% of their principal after taking off the management fee.
For example, you raise a $100 million fund with a 2% management fee. The total management fee you will take from the fund is $20 million over 10 years. In other words, you have a $100 million fund; however, you only get $80 million to invest. To get into a bonus position to be able to take carry, you need to be able to return 120 million plus whatever expenses before you. It’s not as easy as outsiders think because early investors usually have more hurdles to go into that.
On the other hand, closer 80% of the private equity fund managers can return the principle because they are going after a much lower risk status with a much more stable likelihood of returns. Also, their risk profile will determine how they live their life. Only as they do well on their first fund paper, they are likely to raise their second fund on the promise of their first fund.
Break out with your companies kindly
Breakups are always so hard for everyone. To stop your funding timely after recognizing the potential losers in your portfolio is also tough, particularly with early stage companies, you all want to be there to help them bounce ideas off. Moreover, it is quite antithetical for most venture investors, particularly when they’re looking to raise another fund and want to prop up the valuations of their portfolios.
Break up with your losers early but need to do with kindness. You can support the losers by helping them find a haven, merge into another entity and have a successful exit, thereby you can get back of the dollars that were invested. To outperform other ventures, breaking out with your companies kindly will give you 20% to 50% cashback, so don’t just let your losers completely die
Add value at every single turn
Big funds with many investments and professionals haven’t necessarily understood the plight of the entrepreneur and the empathy that’s involved. For them, venture investment is a 30% winner game, and everything is done after writing the check. It is a relationship game starting from treating people to making sure you are doing all you can to add value at every single turn. Even if it’s not something that gives you immediate value back, for example bringing great talents in the network, we should think about the long-term value of helping companies. That’s where you build your reputation over 5 to even 20 years.
As a venture investor, venture capital investment is not pure finance neither craft nor art but three of them combined. For sure, investment is based on financial theory which takes many hours to learn during VU days. Its craft part includes strong technology insight, interview skills and how to build a comprehensive model to monetize ideas. Finally, we need artist’s keen observation to identify individual entrepreneur characteristics and support each other.
Why you want to become a VC investor? I started to wonder what else financial professionals can do to build a better world after the COVID-19 outbreak. Today, I am inspired by the intersection between finance and entrepreneurship and the many opportunities and possibilities we have today to change the trajectory of our future. Wish we can create a stable venture capital ecosystem for founders and investors one day.