How Smart VCs Invest Their Money

Whether you want to become an investor yourself, or are a startup entrepreneur wanting funding for your own venture, it’s smart to gain some insights from how some of the big money funds have made their money and grown so big.

It can reveal their thesis for saying yes to startup pitches, as well as what they may have done well, or not when it comes to putting their own investors’ capital to work.

When it comes to pitching you will need a killer pitch deck and starting out with a great pitch deck template is without a doubt the way to go.

They Look For BIG Opportunities

Venture Capital firms are looking for big, out of the ballpark home, runs. They are seeking 100x returns. So, think about the amount of money they are investing, and how much that company has to grow in value for them to achieve that. Today, at a minimum, that is ventures with the potential to easily become multi-billion dollar companies. That means the market their startups are taking on must be worth 11, 12, or 13 digits a year.

As an investor, you may also want to prioritize market size when considering an investment and reviewing all the pitch decks you are receiving. As a startup entrepreneur, you had better make sure you are in a really big space, and you make that really clear and obvious with the data in your pitch deck.

They Focus On The Founders

It’s rarely about a once in a century genius idea. The truth is that ideas are cheap and plentiful. They are rarely unique. What really makes the difference is a founding team, and their ability to execute and keep going no matter what. Business ideas, forecasts, models, and products will invariably change after an investment and will keep evolving over years.

It’s far more important for success that the founders have the necessary resilience for this, and if they don’t personally have all the capability they need, at least they have the right mindset about finding, hiring, and empowering others to fill in the gaps in skill.

They Invest In What They Know

It may not sound very innovative or progressive, but it is true. Many VCs are very rigid on what they invest in and their criteria for investing. They may stick to software versus hardware, particular business models, like enterprise, or within a certain industry, like healthcare. They also traditionally like to invest in a certain stage of business with similar check sizes. They have their own systems.

This can be really frustrating for many aspiring entrepreneurs, but that’s how it is. The key to fundraising in this environment is to find the investors who are a match and to understand their checkboxes so that they meet what their target investors are looking for.

They Invest Together

The hardest, and in turn, the most important part of fundraising for startups is to land the lead investor. Once you have a lead investor, pulling together a few others is relatively easy. In fact, your lead will probably help you. They flock together. Once one reputable or enviable investor is in, no one else wants to miss out. They think that the lead must be on to something.

Of course, from an investment perspective, it can also be very valuable to be investing alongside other smart money with similar goals and philosophies. It’s more likely you’ll have similar conclusions and actions in various scenarios, as things progress. As a founder, it is then all about just landing that one first yes.

They Diversify

Most well known VCs are well known for diversifying. It’s not always easy picking a 100x bet. Even for the most experienced investors. The majority of ventures they will invest in will go bankrupt. Some will do okay, but not come nearly close to their hopes. A 10x return is good by most measurements, but one 10x exit won’t be enough to make up for all of those other losses to write off or any other underperformers. So, they have to make a lot of bets, and spread their risk in a variety of baskets. Each with the potential to deliver 100x.

They Focus

Some angels and fund managers take a very different approach. Like Peter Theil. He believes in focusing investments instead. Making bigger investments in fewer ventures. This way he feels that he can have a bigger impact. If you put a billion dollars into something, that on its own can produce the desired success by force. It won’t guarantee it if everything else is being done poorly, but it can certainly help.

By also investing in spaces they understand and have connections and experience in, they can have even more influence on outcomes by applying their knowledge and personal influence to make that venture successful, even where founders are lacking.

They Invest In Their Own Backyard

This has often been a pet peeve of some entrepreneurs, and one of the big things which could certainly change from 2020 onwards. While VCs are often seen as being a part of this incredibly innovative environment that bravely changes things in a big way, they’ve remained very traditional and old school in this one way. It’s why most of the money has stayed in Silicon Valley or New York.

They’ve often demanded founders move their teams to be local in order to get the money. All in spite of the fact that many billion-dollar businesses now operate completely remotely with distributed workforces. Recent events may force them to change these policies and it could be much better for the startup ecosystem and progress in general.

They Invest In Companies That Can Go Fast

In contrast to private equity, venture capital firms are looking for startups that can move the fastest. It’s essential for achieving those outsized returns. They are also often on a deadline to pay back their own investors too. They like to know whether their bet is going to be a big win or write off quickly, perhaps, sometimes even at the cost of breaking some of their own portfolio companies.

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