As you can now known, venture capital is an industry with a high failure rate.
Standard & Poor’s recently reported that the bankruptcy of venture capital and private equity portfolio companies reached their highest number since 2010and this includes companies that has raised over $1 billion in venture capitallike Vice Media.
Along these lines, it’s unfortunate that we still don’t hear enough venture capitalists talking about their mistakes, or at least not with the same frequency as they indulge in self-congratulatory speeches.
However, in cases where VCs talk about failure, you can often hear them echoing factors such as unpredictable market shocks, or a “Black Swan” event, which is not good enough. timing, the wrong leadership team, unsupportive co-investors or a poorly designed business model. which becomes unprofitable.
While these concepts are useful for a cautionary tale in an MBA case study and often, in effect, affect the return on investments, the more numerous non-economic mistakes that VCs have done because of their human nature is seriously underestimated. Given the current liquidity crunch, I’ve tasked myself with understanding these blind spots and turning them into actionable advice for entrepreneurs actively fundraising. There are many, but today I will talk about three of them, which cost a lot of money to investors and are necessary for anyone who plans to put their startup with an investor to know.
Many investors are more likely to support a founder with whom they feel a personal connection
This is true even if their numbers and products are worse than those of a less well-liked founder.
When a moment of human connection occurs, it’s hard to dismiss. Therefore, if we make this bond with someone, we will automatically trust that person more.
The number of non-economic mistakes made by VCs due to their human nature is seriously underestimated.
Many factors can cause this bond. Maybe they also play golf or football, are alumni of the same university we went to, or have the same sense of humor. It’s hard to guess. However, what cannot be denied is that by seeing the newly met individual as one of “us,” we have lowered our defensive barriers. We feel safe in their presence and are more likely to feel comfortable investing in their business.
On the other hand, if the person feels like a stranger, the amygdala in our brain activates, and our survival instinct kicks in. therefore, our brain says, we better watch out.
Most VC funds have multiple partners, and their personalities vary. This is done intentionally to help the fund connect with a more diverse base of traders and counter these potential biases. So, with any fund you approach, having a better understanding of the different investors will help you know who to go for. Before hiring a venture capitalist, take the time to learn more about them as people. Once you learn this method, you can have an idea of who you click with and approach them accordingly.
I can share with you examples of how our team can do this. For example, Joel is one of our partners, and he likes active, passionate, and energetic founders. On the other hand, Saagar is more likely to agree with founders who are scientists or technology experts and who can thoroughly analyze the technology side of a startup. Then there is Ruslan, who melts when the founder is very strategic and at the same time can be detail-oriented. And of course, there is me, who loves business founders with a great pirate spirit.