One month in venture capital
6 December 2019
By Alexander Stroud
I joined Concentric a little over a month ago now. In my head, this was the role that I had dreamt about. I’d broken into an industry cloaked in mystery to those on the outside. As I walked into the office on my first day, the overriding feeling was one of excitement. Of course, there were the typical worries associated with starting a new job. Would I get on with the team? Would I be smart enough to contribute? Would I have the energy after my hour-long Central Line commute? But these feelings soon melted away as I was welcomed by what is a fantastically smart, friendly and quirky team.
At some point during the day, I received my first piece of advice: “Brace yourself, it’s going to be a weird six months”.
One month in and I can now see what was meant by this comment. We are going through a particularly busy period as a firm, the learning curve is steep and — as with any young firm — the role requires a huge amount of independent learning. Furthermore, I need to figure out what it is that makes me tick as an investor and how this can add the most value to our team. That said, these are all things that attracted me to Concentric in the first place.
I am looking to develop 3 key skills in 2020 — introspection, creativity and drive. Below I’ve considered the importance of each skill, whilst also commenting on the role of structure in their development.
INTROSPECTION – WHY DO WE THINK WHAT WE THINK?
This topic has been on my mind of late, particularly in the lead up to the recent election in the UK. Given the sheer amount of information we are bombarded with daily, I think it is increasingly important in life to be cognisant of what has previously and what continues to shape our views. It is no different when it comes to venture investing. As investors, we must often make decisions about companies we know little about in very short spaces of time, and this leaves us vulnerable to external influence and individual biases. External influences can range from ‘the generally accepted view’ (perhaps driven by one or two reputable venture funds) to aggressive PR coverage masking the reality behind closed doors (think Elizabeth Holmes and Theranos). Individual biases can include discounting an idea due to a lack of understanding, disliking the format of a deck or associating the company with another well-known failure in the space even though they may be operating differently.
A failure to challenge our thinking may have resulted in the current climate, in which an excess of capital coupled with endemic groupthink has resulted in some disasters, namely the farcical situation at WeWork and erratic performance of high-profile IPOs (Uber, Slack, Pinterest). It is clear that we don’t quite understand how to value loss-making, high-growth companies and, with a potential recession on the horizon, the general mindset has shifted to one of profitability and sustainable growth.
Warren Buffet is famously quoted as saying, “only when the tide goes out do you discover who’s been swimming naked.”
The tide may not be going out yet, but it is showing signs of turning. In times like these, introspection and the ability to think from first principles will be key. We should be scrutinising business fundamentals and making objective decisions. I don’t quite know what the most effective way of cultivating this skill is and maybe it will be the subject of a future blog post, but one thing I do know is that I’m not much of an exhibitionist and when the tide eventually does go out, I want to make every effort to ensure that my lovely pair of Speedos* are on display.
CREATIVITY – WHAT CAN WE SEE THAT OTHERS WON’T?
Creativity isn’t something that is traditionally associated with finance. The reality is that if we are to achieve outsized returns as a fund, we need to think creatively. This applies to a number of different areas, and the end goal is to work out where our time and energy is best spent.
The most obvious area for creativity is in our focus, which can be sector, stage or geography specific. For example, do you fundamentally believe that space travel will emerge as an industry over the next 5–10 years? Do you believe Series B stage companies are under-financed in Europe? Or that Spain is the next unicorn breeding ground? Focus could be a combination of all three, perhaps tied together by a demographic trend. For example, are you excited by early stage mobile-based start-ups in the Philippines because of a tech savvy population with a median age of 25?
Secondly, and tying in with the point on introspection, being creative involves thinking beyond our own limitations, experiences and biases. This is difficult to do in practice and so diversity of thought across a team is needed — this can be achieved through a focus on diversity of background, not solely gender or ethnicity. And finally, creativity relates to the investment process — ultimately, we need to analyse companies efficiently and I will come back to this later in the article.
DRIVE – HOW DO WE PLUG THE GAPS?
Once you have identified an interesting industry niche and have validated that you believe in it for the right reasons, ‘deep work’ is required to rapidly upskill team knowledge in that sector. This requires drive, and it can be achieved through desktop research, attending events and lectures, and talking to industry experts. Over time, the team develop a thesis on the subject and ultimately, we become individually and collectively able to better engage and add value to the best entrepreneurs within it.
On the flipside, for entrepreneurs attempting to create a new category or disrupt an esoteric industry, it’s important that you treat us like curious children. No amount of research can substitute for the intuition gained through experience on the frontline, so entrepreneurs should assume no knowledge and explain to VCs exactly how your company is different and where it fits into the existing industry ecosystem.
STRUCTURE IS IMPORTANT, BUT TOO MUCH IS DETRIMENTAL
The glue that holds everything together is structure, which I believe allows an investment team to strike the right balance when it comes to two fundamental tensions — one relates to autonomy and the other to productivity.
The first tension is between process and free flow. There must be enough process to ensure that everyone in a team is informed, knowledge is transferred, and companies are analysed in a systematic way. However, investors in a venture fund are hired to be individuals and therefore, there must be enough of a pioneering mentality within the organisation to allow these individuals to work autonomously, make decisions and pursue their specific avenues of interest.
The second tension is between quantity and quality. The two are typically viewed as substitutable — one must be sacrificed for the other. In venture, that relationship breaks down. In whichever niche a fund operates, a team must see as much as possible to maximise the chance of finding a winner. Therefore, as venture firms are usually quite small, it is important for each individual to be as productive as possible. This can be achieved in a number of ways, including clearly defining the investment thesis, discussing how individuals work best, understanding how to most effectively communicate as a team and leveraging operational tools, for example:
NOTE TAKING: OneNote, Notion
CRM AND PIPELINE MANAGEMENT: Affinity and Pipedrive
ACCOUNTABILITY AND TASK TRACKING: Monday.com
Create a structure that works (which I believe we have at Concentric) and work becomes fun and rewarding. Team members have more autonomy and are more productive, allowing them to develop the three core skills mentioned. Get the structure wrong, and individuals can easily become confused, distracted and overwhelmed with non-value add, non-investment related tasks. Team focus becomes reactive and this will ultimately be reflected in the returns.
I’ve been informed by numerous sources that the longer you stay in the venture industry, the more pessimistic you become. That remains to be seen but as is stands, I’m firmly optimistic and excited for what the next 5 of these 6 ‘weird’ months entails.
*I don’t actually wear speedos