After joining Peak two years ago, I recently got promoted to Partner 🎉🍾. Time to celebrate and to reflect on what I’ve learned. In those two years we looked at more than 10.000 companies, did 100+ deep dives, and invested in 17 (soon 19!) companies.
Along the way I learned a thing or two… or six. Hopefully, these learnings can help other young VCs on the same path. Happy reading! 🤓
TL;DR:
- Figure out how you build conviction.
- If you can’t build conviction, decline fast.
- Avoiding false negatives is more important than avoiding false positives.
- Win competitive deals on speed, brand, or terms.
- Hiring senior talent is key for portfolio success.
- Valuation is an art, not a science.
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1️⃣ Figure out how you build conviction.
Investing means you have to believe in something. You have to believe that what you’re investing in will be worth more in time. For early-stage investing this belief is especially important as there is often not much data or proof points yet to build your belief on.
The term most VCs use for this is conviction. Founders will (try to) convince you with their vision and hockey stick charts, but it’s up to us as investors to build conviction.
One of my key learnings over the last two years is that different people have different ways of building conviction. One VC may have a strong conviction of a company/founder after a single meeting and two reference calls, while another VC needs more time and wants to look at whatever data is available in the early stages. A third VC may look more towards market dynamics and competition.
To be able to lead deals in VC you have to find your own way of building conviction. You have to figure out what makes you tick. That can be a founder with a previous exit, great initial unit economics, or a fast-growing market.
In the early stages you’ll probably find that one or two factors may make you tick, but others do not (yet). One of my colleagues likes to say: “There is always a reason not to invest, but let’s focus on the reasons why we should invest”.
Build your conviction by looking for things that make you tick.
2️⃣ If you can’t build conviction, decline fast.
Most successful fundraising processes go something like this:
- Founder(s) meets with Associate / IM at a fund;
- IM gets excited and discusses deal with Partner;
- Partner and IM have a second call with founder(s);
- Partner also gets excited;
- Investment team (Partner + IM/Associate) do a deep dive on the company;
- Partner gets more excited and discusses the deal with other partners;
- Other partners also get excited > the fund offers a term sheet.
Notice how throughout the process people are getting more and more excited over time. This is a very important proxy that we use internally. If every next interaction with a founder leaves you more excited, things can move fast.
The opposite is also true. If you have had a meeting with founders and you are not super excited to move forward / schedule another call / dive into their company, this is not a good sign. In such a case it’s best to respectfully tell the founders that you will pass on the opportunity to invest.
This goes back to an insight that I learned from a VC when I was fundraising as a founder. Their investment team always checked in with their energy level after a meeting. Was this an energy booster or an energy drainer? If too many people had an energy drainer, they would decline.
For founders this also provides a good yardstick to assess how you’re doing. If things are moving fast and more (senior) people from the investors’ side are being pulled in for meetings, this means you’re on to something. If you’re having a third call with the same person but aren’t moving forward, it’s probably better to focus on other VCs.
3️⃣ Avoiding false negatives is more important than avoiding false positives.
VC is a game of power laws. Returns within a fund are usually driven by one or two extreme outliers.
As an example: Benchmark did an initial investment of $9M in Uber and held a stake worth roughly $6.2B at the time of the IPO. Along the way they also sold $900M worth of secondaries, making their total proceeds on the Uber investment roughly $7.1bn. These investments likely came out of Benchmark’s $425M 2011 vintage fund, meaning the whole fund was returned 16.7x on this single company. Even if all other companies in this fund went bankrupt, the LP’s in this fund would be very happy.
Case in point here: for VCs it’s OK when some of your companies fail and go bankrupt as long as you have one (and preferably more) positive outlier(s) in your portfolio.
I like to think of these as false positives and false negatives.
🔴 False negatives are companies in which you chose not to invest that became huge successes.
🟠 False positives are companies in which you chose to invest did not do well (i.e. the business went bankrupt).
Our job in VC is to make sure that we minimize the number of false negatives, while it’s OK if to have a few false positives (in moderation) along the way.
I bet these investors who passed on Airbnb at the seed stage feel the same.
4️⃣ Win competitive deals on speed, brand, or terms.
The VC market is getting increasingly competitive. More and more capital is entering the market: European funds are getting larger and larger and US investors are (finally) flocking to Europe in search of returns.
As a result, competition for the most exciting companies is heating up. Funds are being forced to do their DD’s at neck-breaking speed and valuations are ever-increasing.
In other words: It’s a founder’s market, and for some companies the power balance has shifted to their side of the table. Those companies get to choose which fund(s) they want to take investment from. To be competitive as a VC and win these deals you need to offer (at least) one of these three things:
- Brand: Everyone likes to work with a superstar. Who wouldn’t want to have someone like Luciana Lixandru or Andrew Chen on the board? Funds like Sequoia or a16z attract the best founders and thus they can win deals on their brand. Smaller funds (like ourselves) can – to some extent – do the same and get into deals by having a differentiated brand and offering (like the fact that our fund is fully backed by entrepreneurs, and you get access to 100 successful founders as advisors)
- Speed: I don’t know many founders who enjoy lengthy fundraising processes. Most founders would like to seal the deal in the shortest amount of time possible. By offering a smoother, faster process, VCs can get into and close deals before others can.
- Terms: If you can’t impress on brand or speed, you can always buy your way in and offer founders a higher valuation or more friendly terms. More on this in the next learning.
5️⃣ Hiring senior talent is key for portfolio success.
When we invest, companies typically have anywhere between 2-20 employees Those first employees are usually relatively junior as the founders do not have sufficient money to attract senior talent with competitive salaries.
Once a VC gets on board, that problem is (temporarily) solved. With the money in the bank, it’s time to build your A-team by hiring more experienced and skilled members.
Naturally, the types of hires depend on the type of company and your trajectory, but I believe this general rule to be true: hiring senior leadership – especially right after your first >$3M fundraise – will accelerate your growth.
Our friends at Notion Capital wrote a fantastic report on this topic a while ago. Here’s what I took away from it:
6️⃣ Valuation is an art, not a science.
Determining the price of an early-stage company is no easy feat. There is usually not much (financial) data available, so traditional valuation techniques don’t make much sense. What is a realistic multiple for a company that made its first revenue 2 months ago?
The economic laws of demand and supply do apply. If multiple investors are interested in your company, you can likely command a higher valuation. If one investor says your company is worth €10M and another says €20M, who is right? Who cares. You will probably pick the second offer, right? That’s what I meant before by winning deals on terms.
How can it be that investor A says €10M and investor B says €20M? Investor B sees something in the company that A does not. Perhaps B is more bullish on the market your company is active in. Or maybe B has worked with this founder before and knows what they’re capable of.
Ultimately it comes down to: what is the price an investor is willing to pay for (part of) your company. I believe it all comes down to (going full circle here!): conviction. The stronger their conviction that they should invest in you and your company, the more flexible they will be on valuation.
7️⃣ 🚀📈
* My back-of-the-envelope calculations: the linked article mentions a valuation of $8.25B for Benchmark’s stake at an expected $55 IPO price. The actual IPO price was at around $41.6, so the valuation of that stake was roughly $6.2B. $7.1B / $425M fund = 16.7x