I continue from last week looking at the ideas I explored and the lesson learnt over the course of the last 8 months. There are two broad areas to discuss – attempting a Venture Fund and working with startups. The first series of posts is about the former which will be a nice record for myself as well as a little reminder for anyone who attempts to actually go down setting up a Venture Fund. As a disclaimer – these are my own thoughts and ideas based on my experience. There really is no set way of going about this – your connections, experience and luck will play a big part!
1. The beginning – solving a problem
The investment/VC market is quite crowded at the moment – especially at the seed investment stage (i.e. first ‘proper’ round), so to set yourself apart I think you should approach your aims as you would when beginning a startup – what is the problem you are trying to solve. One of my favourite posts is ‘I have an idea’, and I suggest thinking long and hard about this. More so if your background is not in VC investing where you do not have a proven track record. In this scenario you will work with your expertise and vision.
It’s probably an idea to look at your market and assess if the environment is right for high growth companies. People will only invest in your fund if there is a chance of finding that ‘one big’ win. Out of 30 odd investments you would be doing, consider yourself an absolute success if 2/3 actually come off. Small odds – and the first (of many) warning signs of the pitfalls in Venture Capital. When you are starting a Fund it’s worth treating it as a startup, but with more risk!
After doing all that create a one-liner outlining your vision. In my case:
‘Helping early stage IoT (Internet of Things) and hardware startups to develop innovative products that enable the future while building sustainable growth companies in Amsterdam.’
In essence I was wanting to create a thematic fund – all our investments would be targeted in a specific area, IoT. But even a targeted idea is probably not enough in this competitive investing landscape. You need more – the added value.
2. Added value
The reality is many of the thematic, industry specific VCs already exist – for example finance related investments exist in the form of Fintech, a booming industry. Even though our idea was pretty niche, it isn’t that rare; hardware focused investments have increased during the last five years.
How are you going to distinguish yourself? Why will an investor invest in your Fund as opposed to other competing VCs who are trying to raise money? I break down the potential added value into the following:
- What do you offer startups – other than money, do you add expertise or a skill that makes you unique/appealing to startups?
- Deal flow – how do you show you can get the best deals? Do you have the contacts, network or experience to get ahead of the game?
- Track record – have you had winners in the past? Can you manage a fund and a portfolio of companies?
And that is about it. Warning sign number two – trying to distinguish yourself is really hard. With a surge in firms, there are a lot of VCs with the correct track record, the network to get the deals and offer a skill that makes them attractive.
What did I do? I focused on the ‘offer’ part. I wanted to offer a space/opportunity for startups to develop their IoT product with on hand experts to guide them along the way. This added value because hardware especially can be more difficult in comparison to SAAS/software based startups; there are more steps in making and testing an MVP on the market compared to SAAS; as a consequence its easier to spend/waste money. And nothing like this really existed in Holland.
I managed to find a few spaces in the Netherlands that shared my vision. One of the parts I thought would be difficult proved to be easier than I thought. The other advantage I was keen to promote was keeping it small – 2 General Partners (we’ll come to that later). I wanted to build good relationships with the startups we invested in. I believe that collaboration and trust is essential for high growth companies.
So with a clear idea on how to distinguish ourselves we can start thinking about money and some technical parts of fund building. And maybe best to leave that for next week.