#2 The most important skill for a Venture Capitalist
Insights after my first month working in a VC
Hi everyone , I hope you had a great week! Welcome to my second post so far, yuhu!
So, I’ve been wondering what to write about this week and I thought it would be cool to explore an idea that has been circling my mind: why networking is one of the most important skills for a Venture Capitalist.
Well, Venture Capitalists find good opportunities to invest in. But how do they get to those good opportunities? I have, for a month been searching for companies that as an investor, we feel that can be a good fit for us, that is to say companies that have some or all of the following characteristics:
Great founding team
Growing recurring revenues
Product is software with some technological differentiator
Are in a growing market
Are in the growth stage and geography that we invest in
Highly scalable
Etc
Obviously, every investor is going to look for companies that show some of these traits, everyone wants to invest in a growing, scalable company with endless possibilities… But who gets to invest in those special companies that will become global, change the world and make the investors an extraordinary return? And more important, how do they consistently get to invest in the best companies?
Well, we can see how investors like Peter Thiel (Funders Fund) have invested some of the latests, most successful startups in the world: SpaceX, Stripe, Facebook, Airbnb, Spotify, Figma, Mosaic, and the list goes on…, and although I don’t want to be simplistic (there are many factors that allowed them to access to those companies), in the end it comes down mostly to networking.
Ok, so you don’t believe it? Let’s dig deeper.
So, Peter Thiel cofounded in 1998 Paypal, which became one of the first companies to facilitate online payments and in 2002 was acquired by eBay for 1.5billion. And what happened afterwards? Well, many of Paypal’s early employees went on to create a other mega successful startups. Are you familiar with companies like Tesla, Linkedin, SpaceX, Yelp or Youtube?
How is it possible that a small group of coworkers were able to create so many success cases subsequently?
It’s not luck what drove these exPaypals to create such big startups. During their time at Paypal, they not only learned how to build a great payments software, but also how does a company scale, solving many complex business problems. Additionally, the tight-knit culture of Paypal allowed them to develop strong and enduring friendships, that they would carry over into future projects.
When Paypal was acquired, many of the employees left to start new projects and they continued to support and collaborate with each other, creating a powerful network of successful entrepreneurs and investors. Moreover, many of them started new companies, invested in startups and mentored young entrepreneurs. This led to the creation of a loosely-knit community of successful entrepreneurs, known as the "Paypal Mafia".
So, for Peter Thiel, a successful multiple times entrepreneur, later turned Venture Capitalist, and part of the Paypal Mafia, only had to get in touch with his old coworkers and leverage not only his dry powder, but other investor connections, client network, etc. In the end, he had access to those great companies thanks for networking and for creating a closed community.
If networking is the best skill for a Venture Capitalist to have, being part of a community is the best strategy to network. But how can you create your own community or network when you are starting as a Venture Capitalist? And what does networking truly mean in the real world?
Well, there are many many ways to network like going to startup events, listening to pitches, accessing incubators, meeting people, etc. Nevertheless, I believe it does not matter that much the medium that you use to network (don’t get me wrong, physical, personal relationships will always beat just meeting on zoom), but rather giving value to others is the key to creating good relationships.
Most VCs share dealflow, that is, one VC finding a good opportunity to invest in, might share it with another VC (if there’s room to invest together), if it also fits with its investment thesis and feels it is a great company to go in. However, the VC finding the opportunity is not going to share it with everyone. After all if more funds know it’s a great opportunity the valuation of the startup can raise because of funds competing to invest and that’s not good for investors.
To be the one VC that gets shared the great opportunity you must have a great personal relationship with the other VC, and the way to create that great relationship is actually doing the same for him.
Typically, there are funds that invest in very similar startups and can generate great synergies. You might invest in pre-seed startups and share your portfolio with a seed VC once your startups have grown and vice versa.
Also, it is very common for aligned VC to have a hierarchical relationship. For example, the Analyst of XVC will have relationship with the Analyst of YVC, while the Partners will have relationship with each other. The way that VCs usually keep their relationships alive is by doing monthly or quarterly meetings to share dealflow.
So, to conclude Networking is a must for every VC and creating or being part of a community can set a good VC apart.
Bonus - please read!!!
ARE YOU A VC?
I have been struggling in my team about knowing which VCs we have relationship with, so we don’t duplicate communication channels. Does this happen to you?
I started designing a solution, please let me know if you’d be interested in it. Basically the solution works as a visual CRM that let’s you see what vc’s you have relationship with and with whom and let’s you search VCs and see if anyone from your team has relationship with them. Just to avoid the question: do you know the guys from XVC?
Let me know what you think
Access figma here to see in construction.
My favourites this week:
Top VC Website, personality and team: La Famiglia
Top changing the world startup: Infarm
Please let me know if you liked this second post, if you were disappointed or what would you like for me to focus on more! And share and subscribe if you liked it!!
See you soon!
