The Secret To Achieving Reliable VC Returns (And It Isn’t Chasing Unicorns)
1 November 2018
The venture capital industry is on a roll, with US investments expected to reach $100bn for the first time ever by the end of 2018, and European start-ups also on course for a record-breaking funding year.
As a founding partner in a European VC fund, this is obviously great news, showing that more start-ups are getting funded and that more family offices and institutions are choosing to invest. But all this money flowing into venture is also a big responsibility for VCs, who must now prove their worth through bumper returns – particularly in Europe, where the sector is still in its infancy.
The way that VCs are painted in the media makes you think that getting involved practically guarantees a stake in the next Facebook, Google or Spotify, and the mammoth yields that come with that. But the fact is, landing one of these deals is like trying to find the proverbial needle in a haystack. They’re called unicorns for a reason, and you can’t rely on finding one if you want to deliver consistent, long-term returns. That requires a different approach.
Shooting for the stars vs. hard work
Rather than chasing mythical creatures – or hoping one will fall into your lap – there are more guaranteed ways of achieving 1.5 to 3x returns from venture investing. But you have to be prepared for hard graft, active management and hands-on work with portfolio companies.
With more opportunities than ever to start a tech company, it’s not only harder for VCs to spot the superstars of the future but, faced with more competition, it’s also harder for those who do get funding to eventually break through and scale. This is where the best VCs can really make a difference.
Where ‘VC 1.0’ simply involved spotting and then monitoring portfolio businesses, ‘VC 2.0’ is about being a facilitator and adding real value to start-ups. Capital is a commodity these days, but the ability to provide non-financial support, such as contacts, skills and expertise, has the power to make as much as an impact as the cash – if not more so – giving entrepreneurs access to resources they wouldn’t otherwise have at such an early stage.
Making this approach to work is only possible if there’s a strong and trusting working relationship between the VC and the entrepreneur, and that has to be nurtured from the word go.
Each entrepreneur and each company are different, with their own unique characteristics and way of working. VCs therefore have to spend a lot of time getting to know both the company and the founder(s) prior to investment, to determine the working relationship and the value we can bring to the table – over and above the capital.
Choosing which companies to invest in shouldn’t just be about going for what’s ‘hot’, but assessing what you as a funding team can offer a business in terms of support and contacts to help the business to grow over the long-term. Get it right and you’re in a position to confront issues as they arise and help to resolve them. Rather than letting things “float”, as many VCs do, eventually ending up with an unresolvable situation.
Providing this level of support to a full portfolio is complex and hard work, requiring you to think of your portfolio companies every hour of the day, and ensuring you have the resources to scale along with them. But overall, building strong, supportive partnerships makes the job of a VC investor infinitely easier. And I’m willing to bet that it’s a much better route to higher returns than searching for the next unicorn.