Friday, April 6, 2012

What I like about Venture Capital - part I

Have you ever had a moment in your professional (or, for that matter, personal) life in which you feel like you've lost touch with the reasons that made you make that career (or other) choice in the first place? Or worse, like you've forgotten what they were? There is nothing unusual about that – it's only human nature never to be satisfied with what you have. But those are the moments in which you will need to reassess your choices and make new decisions or renew old ones. A good recollection of what those reasons were will be an invaluable help...

For my first series of posts in this blog, I chose to write about what I do for a living, and what I find about it that makes it very special for me. Hopefully, this will serve two purposes: that of sharing something that is meaningful to me with anyone that is willing to read, and as a personal record for me to check back into in the future, if and whenever I feel that I need to remind myself of a few important things...

I'm a Venture Capitalist.

I haven't been one for a very long time – I have only started it a little over two years ago – (so if you're an experienced VC reading this post, feel free to drop off now... or read on for a possibly naïve, but maybe refreshing, and surely honest, view on what we do), and it's not even something I planned to do, but it's been extremely rewarding. We all try to do what we love best or do best for a living. Every voluntary job/career/life change brings with it a certain enchantment for the novelty, and a sense of pursuit of an ideal. More often than not, however, the novelty quickly wears off, and the pursuit of something (even) better goes on. Again, that's human nature, and it's healthy. Like I said, I'm relatively new to Venture Capital. Yet, I find that it's being fulfilling in more ways than I had imagined, and the enchantment for the novelty hasn't worn off. I'm finding myself thinking that that pursuit can be continued within this line of work. That, to me, is a first. So, I've been putting some thinking into this. Into what I'm finding in it that is so gratifying for me, personally. That's what I intend to share in these lines.

I hope to do that in a way that is readable and understandable by those who don't have any knowledge about Venture Capital. In doing so, I've come to realize that I need to write more lines than what I initially thought I would, so I will be splitting this post into a few separate posts. Whatever your views and opinions, I welcome your comments.

First, for those who are are less familiar with what VC is all about, let me try to de-construct the myth and explain it, in very simple terms (if you're the experienced VC who decided to read on, go ahead and skip this paragraph). A "Venture Capitalist" (more accurately, – generally and most certainly in my case – a "Venture Capital funds manager", in the sense that the people who do it don't usually actually own the capital that they manage – and I'll leave it to you to dwell into what the term "Capitalist" and its declinations actually mean) is an investor who will invest in very risky companies in a very early stage of their development, and then actively help in building them up, trying to make very successful companies out of them. So, imagine you are the inventor of a new technology that has the potential to change the world in some way, and that you are also an entrepreneur, eager to take that invention and turn it into something big. You have assembled a small and strongly motivated team, created your start-up with a cool name and logo and are ready to go. But you still need a couple of things. First, you need money to really get things going. Maybe your technology still needs some development, like needing to build a prototype that will demonstrate to others that your invention will do as well as you are certain that it will. Maybe you need to build your first small plant. Maybe you need to go out and hire a sales team that will get your product to the market. The money from that research grant was critical to get you to where you are now, but is now long gone. You've convinced your family and your friends to chip in, but you understand that is hardly enough. You turn to the more traditional means of financing, such as banks, but only to find out that those guys kick you out the door when you explain to them what you intend to do, and they perceive it as too risky for them – banks will only loan money to people they feel that they can collect from, or they have something tangible to secure the loan (such as a mortgage when you seek credit for your house); such is their business and it's unreasonable to expect them to see it any other way; your start-up – let's face it – may not be here tomorrow... Second, you need someone with some experience that will help you in overcoming many of the challenges and hurdles that you will face in turning your company into something really significant. Maybe you simply don't have the required management skills. Maybe you need help in understanding and navigating the complex web of relationships in the industry that you need to develop. Maybe you need someone that will challenge your ideas and with whom you can discuss alternative strategies for your company, who will keep you focused and motivated to pursue only the best options, because it gets quite lonely at the top. In other words, in what has become quite a cliché in the industry, you need "smart money". That's where a VC comes in. He will study your ideas, your technology and your team in depth and with great care, and if he believes strongly enough in them, he will want to invest in your company. That means he will be willing to take the risk. He will provide financing in exchange for an equity position in your company, and he will become your partner for the next few years in the life of your start-up, actively contributing and putting his experience and his network to work for its development. Naturally, he will not do this out of altruism: his ultimate goal is to provide a financial return for the people who actually provided the money for the investment, which also means he will be in it for a given amount of time (sometimes up to 10 years) and need a way to "exit", to transform his position in the company back into actual money (hopefully worth much more than what he initially invested) after that period. But while he is riding with you, he will be looking for ways to help you build something big and valuable. That, in a nutshell, is Venture Capital.

In the next post on this subject, I will start to dwell on the reasons why I find VC to be such a positively engaging activity, starting with a key characteristic that is not usually very discussed in the literature: the full alignment of interests among everyone involved.

Thanks for reading. 

Risk and reward... (Mação, Portugal, 2004)

No comments:

Post a Comment