It’s fair to say cutting short my management consulting career two years ago to join a new early-stage venture capital (VC) fund with only one investment so far required a leap of faith.  

At the time, Reinventure Fund was looking for their first VC MBA candidate, and while I didn’t really know what to expect from the experience, I knew it would be an interesting experience and I would learn a lot. Here is a list of 7 things that I learnt in my first year:

1. VC is both a science and an art

The great challenge is to both learn the science and perfect the art — the best VCs are deft at transitioning between the two.

  • The Science — It’s common to spend time analyzing monthly recurring revenue (MRR), the virality coefficient, cohort analysis, monthly active users (MAU), churn rates, market sizing, cost of customer acquisition (CCA), conversion funnels, network effect, disruptive business models, revenue forecasts, referral scores and more. Experience looking at these metrics over time and across companies helps you to spot outliers and causes for concern when reviewing an investment opportunity.
  • The Art — Even when armed with data (which is usually limited depending on the stage of the venture), it is challenging to pick winners. This is where a combination of experience in the industry and an ability to trust your instincts plays a big role. These skills are elusive and can take years of practice. Watching Danny and Simon, Reinventure’s Managing Partners, evaluating the less tangible aspects of a deal has been a great way to understand what other indicators are helpful in assessing a venture.

2. Strong opinions, Weakly held

In early stage start-ups, data is scarce and historical precedence is limited. Yet our job is to make the best possible investment choices and provide advice to entrepreneurs to build successful companies. How can you operate with certainty in a world that is consistently tumultuous, uncertain and uncharted?

One key tool is adopting a ‘strong opinion, weakly held’ mental model. This means using what little data is available, combined with your intuition, to form a strong opinion from which to drive forward a decision or result. However, it’s equally important to have the skill, maturity and presence of mind to not be overly dogmatic, and to allow your opinions to be revised in the face of opposing information.

While this might sound easy, it is a real skill to take a stance publicly (in front of your workforce, team or business partner), and then be secure enough to change it without losing precious time or letting your ego get the better of you.

3. People skills are key

One of the key skills that can help in developing your VC instinct is the ability to read and understand people and personality dynamics. When assessing ventures, one of the most critical determining factors is whether we believe the founding team is capable of building a large multi-million dollar business. Do they have the hustle, drive, intellect and resilience required? What are their strengths, where are the gaps, and therefore what kind of team do they need to surround themselves with to bridge those gaps?

These skills also come in handy post-investment. Building good relationships with your founders, and ensuring they maintain positive relationships with their team, can make the difference between a high-performing startup and one at risk. These relationships also ensure effective board performance where the venture capital group has a seat on the board.

4. Startup-VC relationships are highly analogous to romantic relationships

Startup co-founders enter into a relationship much like a marriage. They have a vision for their future, spend a lot of time together, and bring new people into their world to help build that vision. Sometimes they fight, disagree, and jostle for power; the rest of the time they are best friends, trying to realise their vision in a world that keeps throwing challenges their way.

Taking the relationship analogy further, startup investing is a lot like dating, and being a VC feels probably a lot like being The Bachelor/Bachelorette (TV Show):

  • You meet a lot of interested parties
  • Most of them aren’t quite what you are looking for, and they all seem to want one thing from you
  • Sometimes you find a candidate that stands out, and you think this could be something special. But then there is some drama or complication
  • Finally, you do find an ideal match. They value both your intellect and your assets, and you like spending time with them. So you invest and the marriage begins
  • Now you are on the same page like any other committed relationship, being supportive in all ways possible and building towards the same goal (in this case usually a successful exit)
  • But… break-ups do happen and they are really hard — emotional and damaging on all sides

While it may sound like a glib comparison, viewing VC-startup relationships as emotional partnerships as much as financial ones is key to adding real value as a VC and ensuring true alignment between both parties — which is critical to weathering the storm when the road gets rocky. And it will.

5. What keeps a VC up at night

  • FOMO: A VC’s version of FOMO is missing out on the next great venture. We’ve all heard the war stories of industry veterans turning down the next unicorn, but it doesn’t make it any easier…
  • Co-founder dysfunction: Vetting your prospective investments through the lens of relationship compatibility (see points 3 and 4) not only ensures you will be able to build good rapport with the founding team, but also helps you pick up or anticipate issues between them. Unsurprisingly, this can be a make-or-break situation for the business.
  • Unjustifiably high burn rate: Paul Graham wrote a great post about how all startups are ‘default alive’ or ‘default dead’, based on the rate they are burning through their cash. This metric is constantly on the mind of a vigilant VC.
  • The next fund: A little understood fact about venture capital funds is that they go through their own capital-raising process to build the fund that will then invest in other startups. Every VC is looking beyond their current fund to the next one to ensure they can maintain momentum and deal flow, and increase their investment impact in the startup landscape.

6. What VCs love

While there are nuances to every investment conversation and opportunity, a dream venture looks something like:

  • A successful serial entrepreneur who is reasonable about their company valuation
  • A big, hairy, audacious vision that is believable, and that targets a substantial market
  • Models with strong network effects or a platform model
  • Proven product-market fit with paying customers
  • Pursuing a disruptive business model that incumbents can’t follow
  • Bonus points for businesses that are doing something that makes you think, “That’s really cool!” We want to be as excited as you are about your venture.

7. It’s more grit than glamour

Making money in VC is hard. The odds are against you and your ventures; there are a plethora of things that can and will go wrong. It is incredibly difficult to build a new business, let alone prove a new business model. This means supporting your ventures through a perpetual war where victory can seem far away. Given the time horizons, you don’t really know if the decisions you are making today will ultimately yield a successful outcome. To make this even more challenging, the operating budgets of most VC firms are lean, meaning resources can be stretched, much like the startups within the portfolio. You are constantly juggling multiple battles across the portfolio, with the potential return on your blood-sweat-tears investment at least 7+ years away — if it arrives at all.

Especially for an early-stage fund, belief in the potential of your portfolio is what keeps you going. You’re alongside them for the ride — both the lows and the highs.

Footnote: The best job on earth

When I am getting to know someone new, I often ask, “If you had all the money in the world to live the life you wanted, but you still had to work a regular job, what would that job be?”. My answer to that question is what I am doing right now — working in venture capital. It is an incredibly unique and privileged position to sit in.