5 Things I Wish I Knew Before Starting in Early-stage VC

I view the startup ecosystem as one of the core engines driving radical innovation and value creation in society and realized (fairly) early on the importance of VC.

VC serves as one of the most critical positions in the early-stage tech industry. In particular for someone who possesses a non-technical skillset (like myself). 

For years, I tried to self-educate myself about VC and the startup industry. I read and studied as many books, articles, and podcasts as I could, and watched as many episodes of Silicon Valley as possible to get a glimpse into the life of a VC. 

I have now been with byFounders for 9+ months and I have come to the conclusion that VC is not something that can be self-taught. 

VC is more like a black box, where the internal workings can only be learned by diving into the job with an open mind, determination to learn, and willingness to do whatever work lands on the desk in front of you. 

Here is what I have learned.

1. VC ≠ investing in startups

Venture capital does not simply mean investing in startups of any kind. VC funding is not designed for all types of startups and, vice versa, not all startups should be seeking VC funding. 

So, the question becomes, who is VC relevant for, and what types of businesses should a VC fund? 

As my colleague, Martin Krag, defines it:

“Venture Capital is a very specific instrument used to fund companies capable of explosive value creation over compressed periods of time by building and launching products in stages, unlocking new pools of capital as the opportunity is gradually de-risked.”

The bottom line is Startups = Growth. As a fund, our job is to invest in explosive value creation and radical company growth. We are not in the business of simply investing in startups.

On top of this, startups who seek VC funding not only need to grow fast. They also need to reach massive scale. As Peter Thiel’s Fight Club Rules for VC outline, there are two rules. First: only invest in companies that have the potential to return the value of the entire fund. This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

So, in the eyes of an investor, if a startup doesn’t have outlier potential for explosive value creation as well as the potential to return the value of the entire fund over a compressed period of time, then it is not suitable for investment from a VC.

2. VC is a different type of job

VC is a resource optimization problem with one main fixed constraint - time.

Instead of building time-constrained deliverables for corporate clients on predetermined deadlines, or building products in startups to meet deadlines of a product roadmap, VC is a game of decision-making.

You need to figure out how to spend your time optimally as all time spent on one task is a tradeoff from spending time on another. You need to be efficient at making decisions.

Say, for example, that you have 100 possible deals to invest in each month, how do you quickly cut it down to 10 to look at/read the deck, then cut to three to deep dive into, and then invest in one?

Mechanisms (i.e mental models and ways of thinking) need to be built to manage this process. Otherwise, you can spend all of your time looking at the 90 deals that weren’t even worth considering in the first place.

This is definitely not something I grasped instantly, but it is something I would stress to anyone entering this industry. It’s a challenge to develop the thought processes, structured thinking, and time management needed to reduce opportunity costs on the job.

3. The week-to-week consists primarily of four key work functions 

The week-to-week at a VC consists primarily of four key work functions:

1. Sourcing deals
2. Evaluating deals
3. Investment decision-making /winning deals
4. Supporting portfolio companies

At byFounders, everyone on the investment team does this, but will spend a different proportion of their time on each:

As an intern, your distribution will probably look something like this:

• Deal sourcing: 5% to begin with but with gradual increase
• Deal evaluation: 60%
• Investment decision-making/winning deals: 20%
• Portfolio support: 15%

Being able to participate in the end-to-end investment cycle, from participating in investment committees to supporting portfolio companies, allowed me to be thrown into the deep end and accelerate my progress.

‍ Note: many VC funds only let interns/analysts/associates participate in deal sourcing and evaluation.

4. Investors are masters in gathering and assessing qualitative data

If you’re investing in early-stage companies, you will need to develop the skill of building conviction (conviction is a critical but difficult skill to develop) and confidence to make decisions based on very few qualitative data points, and you will need to understand what the avenues are for gathering this qualitative data. This is why having a strong network in VC is so important. 

A common data point in VC is information derived from discussions with investors and founders from your network as well as the customers/clients of the company you are evaluating. 

In every deal I've been a part of evaluating, I have called a combination of founders from our 45+ company portfolio, byFounders Collective (consisting of founders and operators from Skype, Pleo, Vivino, Zendesk, Tradeshift, Kahoot + many more) to help me form an investment decision.

On top of this, to make critical evaluations, you need to understand what makes a good founder and you need to have an educated understanding of various industries, business models, and technologies. If you’re interested in a career in VC, start thinking already now about what industries interest you and where’d you like to delve deeper.

5. How to evaluate a deal (a skill to develop)

There are many frameworks used to evaluate deals. At byFounders, we use the 8Ts (Team, TAM, Traction, Timing, Tech, Transformative, Transparency, Tomorrow).

However, should all of these parameters be ranked equally? What is the hierarchy of parameters? Why are certain parameters valued more than others?

This varies depending on the stage of investment but the general consensus in early-stage VC is that the Team is most important. As a community-powered fund, for founders by founders, the Team of course comes first to us too. 

Logically, the team is usually the one fixed parameter in any investment, whereas market/TAM, product, and the others, can always change.

I would personally argue that market opportunity/TAM is the second most important as, even if you have the best team and best product in the world, if the market isn’t big enough, then it can disqualify the deal as a VC case.

As an investor, it’s important to learn what qualitative metrics can be used to assess the quality of intangible parameters. For example, how do you assess the quality of the team? Some parameters can be:

• Did they attend a top university, or top service company (MBB, banking, tech), or are they a previous founder or operator?

• What is their ability to attract talent? What top employees have they recruited and convinced to join them on their journey?

• What previous experience or domain expertise do they have?

• What is their ability to execute? Have they been able to follow their product roadmap and meet deadlines?

• References from previous colleagues, clients, or investors

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Overall, VC is a fascinating game of finding and investing in exceptional founders building transformative businesses in massive markets. It’s not an easy job and I still have much to learn. 

However, I hope this post provides valuable insights into what ‘startups’ qualify for a VC investment, how VCs operate and think, what the job involves, and how VCs gather and evaluate data to make investment decisions. 

If you are someone passionate about tech, startups (in particular if you are passionate about climate tech, health tech, fintech, crypto/web3, and/or AI/ML) - feel free to reach out.