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Decoding the Brain of a VC

19 April, 2010
A venture capitalist is a person who invests in a business , providing capital either for start-up or growth. Venture capitalists aim for a higher rate of return than would be given by more traditional investments. My years of interactions with VC’s have made me come to a conclusion that their brains are certainly wired differently. Just like entrepreneurs demonstrate certain common traits across the world VCs have certain traits. And when it comes to India I think the breed goes through another generation of transformation. To help entrepreneurs and startups better understand how to deal with the complex  brains of the Indian VCs, I have put together my version of their brain map. Of course this is generic and there are many exceptions to the rule. 
 
Ego
Being a VC in an emerging markets like India is like being a VIP. You are at a very high pay scale, constantly being pitched by smart entrepreneurs, called to give speeches at every major conference. At businessplan events, they are almost mobbed and receive endless amounts of emails, phone calls, SMS most of them trying to desperately convince them into liking them. They meet CEOs of top companies, are in influential company boards, and get an ego massage from everyone who meets them, what a great tie! I like your hair style, I love that advice you gave me, that investment of yours is the next Facebook are very common compliments. 

Its but natural  for any human who is living in an environment like this to develop a bit of an EGO. Its really complex dealing with such people and you too can easily get into the EGO massaging mode. However, I think what really works with VCs is being real and challenge them, question them and you dont have to agree with them on everything and deal with them like a real person. 

Valuation
Industry multiples, PE ratios, fair valuation, value of intangible assets, value per subscriber, value per eyeball, value per friend in social network the VCs are valuation geeks. Constantly reading long reports from Morgan Stanly, Goldman Sachs etc and since their business is to invest at a low valuation and exit at a high valuation they seem to be in a constant valuation mode.

Many VCs have a formal yearly valuation exercise for their portfolio and their bonuses and valuations are linked to this. Even though the VCs know that most of the valuation is theoretical unless there is a clear cash exit in a company. They would spend months negotiating a valuation which they believe is true. Normally the number is very low if they are investing in a company and the numbers flips to be very high when they are in selling mode. Its very tricky working with VCs on valuation as I have seen many deals fall apart because of valuation and it’s best to bring this up fairly quick if you are in a detailed engagement with a VC as the difference could be a lot.

Attention Span
Stop looking at websites and MBA books which told you how to make and present business plans. The world has moved on and today a VC is constantly pitched with plans, ideas, tweets, Facebook status messages, blackberry messenger messages and dosen’t really have the attention span or time to go through 45 mins. of a 50 slide power point slide.

Don’t get me wrong they will certainly sit through the 45 mins of presentation but in about 10 mins fingering his blackberry or playing brick breaker. So it is important for you to work on 30 seconds and 10 minute elevator pitches and see how you can really explain your business in a matter of tweets. PowerPoint is becoming more and more pointless.

Buzz

VCs always tend to react to the current buzz. If the last big acquisition was in the cloud application space they would suddenly start looking at cloud investments. If a high profile investor or entrepreneur invests in a segment that becomes the flavor of the month and as most VCs react to trends and buzz, it’s easy to assume that they are following the herd mentality.

However there always seems to be some kind of strategy in this herd mentality. VCs bet on 3-4 players in any given segment and space. Therefore a smart entrepreneur would focus on catching on the buzz early on and hit the VC at the right time with his plan. The buzz has a very short life and in no time the VC would move to the next trend.

Disclaimer
A typical VC is highly educated normally with a PhD or MBA degree, they are well read, traveled and even though most of them have not run any real businesses these business fundamentals are solid. When they start liking a company they are most forthcoming with ideas as part of their poking holes in the business plan process. However the biggest mistake any entrepreneur could do is take these ideas at face value. VCs are quick to disclaim any advice they provide and the basic rule is if you get screwed by the advice they would shrug off saying that they did not have enough inputs and if you succeed they will be the first to take all the credit.

Questions

VCs are nothing but sophisticated detectives. Probing is their first nature and to question everything is their motto. It is generally a very good sign if a VC starts probing and questioning your business plan. They can ask the most basic to the most complex questions and ask the same questions again and again almost like a 3 year old.

However it is important that as an entrepreneur you answer each of the question hopefully with the same answer and the same passion. In most cases, VCs are doing this not because they don’t know the answer but more to understand the entrepreneurs through process and find possible chinks in the armor.

Management talks

VCs love Management jargon’s, geek talk and case studies. Since most of them have spent a large part of their past lives in management schools, technical institutes and later on in investment banks and financial world,  they love when people use these Jargon’s as part of

their pitch they feel that they are in a familiar territory and your information gets a lot more credibility. They love case studies as it gives them an opportunity to apply their theories at a much smaller scale and see how most of what they learn at school is actually used in business. They also love complex deal structures and excel sheets where every cell is linked to 500 other cells and formulas all over.

Scale

VCs exist because they believe that businesses can scale and if the VC can identify such companies in their growth curve they can make a lot of money. Therefore it’s very important for any entrepreneur to demonstrate how the business can scale. VCs are known to walk out of deals where companies had a good topline and great margins but they operated in business verticals which according to the VCs represent a small market or are difficult to scale. There are many entrepreneurs who run absolutely great and profitable businesses but don’t seem to understand why VCs are not looking at their business.

Exit

If a VC had to visit a movie theater he would get more excited by the huge red EXIT signs than the movie itself. Exits is what they live for, this is what gets them their billions and completes their sense of purpose. A VC would talk to you more about his exits than anything else. It is natural that before your chat with the VC do good research on his past exits. And in your chat if you can make positive reference of your plan with that exit you may just have that aha! moment with the VC. And if for any reason the VC sees no exit in your company he would be the first one
to walk-out of the deal.

Domain Knowledge

VCs end-up becoming jack of all trades they look at so many business plans from various industries, they are in boards of half a dozen companies. They have the best macro level knowledge across domains but its only when you scratch the surface that you realize. But I think this is actually a strength of the VCs, smart VCs would always relay on entrepreneurs to know their domains well and relay on the entrepreneur to take operational decisions. However, the danger is if the VCs decides to apply his domain knowledge on a business.

Silicon Valley

VC’s love Silicon Valley most of them have their HQ in Palo Alto or Menlo Park. Its this small stretch of land which is responsible for bringing to the world-  startups like Google, Facebook, Twitter, Yahoo etc. VCs are obsessed with the Valley they are constantly trying to find out what is happening there, what are the hot startups, domains and tech gossip.

Its not wrong to say that most of them who operate outside of the valley have a Silicon Valley hangover. Therefore during your talks with them giving Silicon Valley examples, talking about the the valley and generally showing that you too are clued on the what is happening in the valley helps a lot. Even though this may not have any co-relation or impact on the local market conditions or business this is undoubtedly the biggest influence.

Beating around the bush
In the past many business plans which were rejected by VCs become billion dollar success stories and currently while a VC would not like your business in many cases they would never say NO. It is very hard to get any direct answer or feedback out of the VCs unless your plan is absolutely pointless and you have to relay on other cues which includes no answers to emails or phone calls and statements like they are currently busy closing another deal, or they love your company but have another investment in similar space, or they would like to see the company at a later stage currently it doesn’t fit their deal size, they don’t have the bandwidth to do more deals now etc. etc. It is not really their fault as they are in a business where they cannot really afford to close the door on anyone. For entrepreneurs who don’t get this it could mean a lot of frustration and loss of time.

Risk talking ability

On the surface the investments made by VC’s in companies seem very high risky but the reality is quiet different. VCs make investments only after detailed business diligence, they like to get comfortable with the management team and work with a battery of lawyers, auditors, analysts etc. before funding any company. They have special rights as a shareholder and all major decisions require their approval. So if you have a very high risk business plan best if to approach friends or family.

Finally dealing with VCs is a complex process while the above rules would apply to most of them there are many entrepreneur turned VCs who’s brains are wired completely differently and like everything there are exceptions to the rule and a lot of these VCs have small corporate or individual angel funds. This brings me to my last point which is still unconfined i.e most of the VC turned Angels have, 666 the gesture of the satanic salute to the devil! don’t you agree?

(Vishal is the founder of Indiagames. He is also a part of The Nokia Advisory Council for Games and advices Nokia on gaming technologies.)  

 


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Decoding the Brain of a VC

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