Before writing this, I’ll make the disclaimer to my friends at VC firms and my other investor friends that I’m not necessarily writing specifically about you. I know many people at many firms and these observations are taken from six or seven years of experience. And I’m in no way saying that VCs are dumb, I’m just saying they don’t know as much as most young entrepreneurs think they do.
When I started learning about venture capital and investing in 1998 I was fascinated by it. I took every opportunity I could find to go and meet with these people. Thanks to being a college student I had a lot of doors opened to me and I’ve been able to develop relationships with a lot of people at almost every VC firm in the state of Utah.
When I first started meeting with these people and talking with them I thought these were business geniuses. These were people who had substantial experience and wisdom, who knew how to make all the right moves, and this is why they had all this money they could invest in startups.
What I’ve learned over time is that VCs and other investors are generally just normal people like you and me. Some of them are smart, some are smarter than others, and some aren’t really that smart, but they’ve got a basic level of competence and they were in the right place at the right time or had the right connections. Here are some specific things I’ve learned. And when I say “VCs” I’m including angel investors in there as well for the sake of not having to type it out so much:
1. VCs are not always right. A VC might look at your idea and say “That’s never going to fly.” But he might be 100% wrong. In fact, I would say that VCs are wrong most of the time, and as evidence I would point to the fact that many successful companies had to present their business plan to anywhere from 50-100 firms before securing funding. Even taking into account that some firms are simply looking for a certain type of business to invest in, chances are many of the firms a successful company tried to get funding from simply didn’t invest because they didn’t believe the company would fly.
Overstock.com, which is well on it’s way to becoming a billion-dollar company was rejected by at least one Utah-based VC firm that is probably now kicking itself.
2. VCs don’t know everything and don’t have broad experience. Most VCs have a very narrow window of experience. The VC who started a technology company probably knows nothing about retail, and the VC who got rich on biotech probably shouldn’t be giving advice to a telecom startup. But that doesn’t mean VCs won’t try to sound like experts on all sorts of things. I hate to think of how many good ideas haven’t been implemented because the entrepreneur assumed the VC knew what he was talking about, when in reality the VCs entire opinion was based on something he heard ten years ago from a friend.
If you know your industry, and I mean really know it, chances are you know it much better than any VC knows it unless that VC has recently worked in the exact same industry and under similar circumstances. While VCs may have some great and helpful knowledge, don’t just assume they know it all.
3. VCs don’t necessarily know what it’s like to be an entrepreneur. I have my own ideas of what it means to be an entrepreneur. Many VCs have never really been in the trenches and had a tough time with a business, and you don’t learn nearly as much by succeeding as you do by failing. Too many people assume they or others are intelligent because they’ve struck it rich, but money is not necessarily an indicator of intelligence. Being in the right place at the right time without even trying or having family connections can do all sorts of things for one’s career. Just because a VC says they have entrepreneurial experience doesn’t mean they’ve gone through what you’ve gone through.
——————–
I’m not saying VCs have nothing to offer except money. I’m saying don’t assume they are all-knowing. Take what they say into consideration, but take it on a case by case basis. Try to get advice from the VCs whose experience mirrors your own and with whom you can make a real personal connection. And don’t take it too hard when they tell you you’re going to fail and they don’t give you any money. If you know you’re right then don’t give up until you’ve shown them who knows his stuff.
VCs at times aren’t even successful businesspeople. They are often investing other people’s money raised in a large fund, not their own. From that perspective they are similar to mutual fund managers, just investing in a different class of assets.
You mention the fact that many deals get passed on 50-100 times before getting funded. One of the primary reasons for that is the lack of preparedness of the entrepreneur(s) and the learning they gain by the process of shopping their deal. With the right eduacation upfront most deals get funded a lot faster.
True, many deals get passed on 50-100 times because the deal stinks, the entrepreneur is an idiot, or the idea they have is just plain bad. I would guess this is the case with the vast majority of deals that do get turned down. Certainly the good deals that involve a good idea, a good plan, a good deal, and a good management team and yet still get turned down by a VC who is actually looking for exactly that type of deal are in the minority, but it still happens a bit.