Checking my phone as I boarded a long international flight back to the US, I noticed a flurry of LinkedIn notifications congratulating me on my 2-year anniversary at Peak Ventures. A rush of emotions hit me when I saw those notifications as I reflected on this path in venture capital, my transition from entrepreneur to investor, and what I’ve learned in these few years.
As an entrepreneur, I assumed that venture capital, though different, would have some of the same highs—and maybe even more of them on account of being involved with many companies instead of just one. But although it’s been exhilarating in its own right, venture investing is a different high—more moderate. As an entrepreneur, you experience higher highs and lower lows. Everything rides on your business’s success– financially, emotionally and otherwise. When things look bleak, desperation swoops down to grasp you in its painful claws. And so too, when execution and opportunity align, exhilaration lifts you up to the thrill of the highest of highs.
Venture capital is more like second-hand smoke. Don’t get me wrong, I get buzzed with excitement every day in my line of work from the challenge-driven passions of the entrepreneurs we back (and in many ways I appreciate that I’m not a user of the entrepreneurial drug anymore)—but I’ve had to reset my own expectations of how I define success and feel joy. It’s like transitioning from being the athlete on the court to coaching my 8 year-old’s team. Hey now, don’t misunderstand and think that I’m calling any founders children… it’s just that I’ve experienced withdrawals from missing the entrepreneurial high, and I’m still learning to appreciate and recognize the different high I feel as a full-time investor. The peaks and valleys of emotion and adrenaline are not as pronounced, but they are more frequent. Every week, if not every day (we’ve backed 31 companies), something interesting is happening.
These Few Years
In your startup, the data of your business stares you down unblinkingly. Your business is your world, inescapable and all consuming. In venture, bits of business performance and intelligence collide against you from all directions, pulling you in chaotic fashion from one portfolio company to another. Signals are ever-sprouting, elastic, and all winking for your attention. As each new investment compounds with the growing list of prospective investments we track, the data points become an increasingly unwieldy pile of raw data. It’s been a challenge to create mechanisms to simplify and distill patterns, to identify critical trends and patterns that give advanced warning. I’ve learned the importance of keeping my nose alert for the scent of inflection—when a company (i.e., its people, traction, market, or any combination) is right for investment, or when it is the appropriate time to accelerate your founders through their J-curve and on to that coveted slope up and to the right, or even when the competitive dynamics of other VCs inflect & cause you to dive into a deal. And I promised myself that I’d not fall into herd mentality…
These data points are elastic and trendy, and not always in a positive crescendo. Companies get hot one month and cool the next, and the size of the investments defines priorities. The investments I’ve led receive more of my time & energy. Also, if we made a smaller investment as part of syndicate, we rely on the other lead investor to pull the weight.
Present Learnings (Day 731!)
So now I am living on second hand smoke and chasing flashing signals of varying sizes. It’s like walking the sidewalk in a big city! And like city living, gaining perspective sometimes takes a long drive, or flight in this case, in order to zoom out from the minutia and be able to sift out the learnings.
For entrepreneurs or operators not in the traditional VC track (i.e., a career in finance and rising through the private equity ranks) who have and will continue to invest in startups, here are two non-intuitive things I wish I knew before making the transition to investing:
- Because it is a different high you will experience, your notion of delayed gratification must evolve. As an entrepreneur you live the principle giving up the luxuries of today for something even better tomorrow. In venture this too holds true. However, unlike running your own business, investing removes you from direct execution of the plan that will deliver that future gratification. Whereas before you may have been Johnny-on-the-spot in putting out business fires and closing deals, now you stand courtside coaching and spectating as another makes the moves. Depending on your relationship and mutual expectation with the founders, you may be more involved than most; but even still, your role is one of financier and advisor. This is fundamentally different than an operating role.
- Own your role as a service provider. This one has been unnatural for me. For years, I’ve worked with accountants, attorneys, data providers, PR agencies and countless other service providers. And even when I have good intentions, a bit of my disdain for them comes through. (Yes, I’m that guy who when talking to AT&T gets heated when they start talking to me about “policy” and why they can’t do what seems obvious from a customer POV). It wasn’t until a friend and fellow entrepreneur, McKay Thomas, called me to the carpet that I finally started to get it. I had called McKay on a weekend, feeling frustrated with one of my founders and hot under the collar. Even though McKay was spending time with his kids, he graciously took the call, listened to me describe the situation, and then said, “Well… it sounds like Hotel Krommenhoek has an unhappy customer. What are you going to do about it?” Simple advice and I took the queue to think of them instead of me. Perhaps this is second-nature for someone who has been in consulting, the financial sector, or who grew up in private equity, but it was an entirely new synapse to be formed for me, the lifelong entrepreneur.
In addition to creating habits out of the investor realities, some entrepreneur muscle memory plays nicely as strengths for a VC. These are the habits I found most helpful in attracting and supporting great founders and their businesses:
- Position your fund incentives to tightly align with the founders you back. Institutional investors, or full-time investors who typically manage their investing from a fund structure, experience a compounding tide that builds with each subsequent fund, and that puts them at risk of getting fat and lazy on fees, thus over-raising capital, and thus diluting the amount of value add to portfolio companies. Entrepreneurs are usually blind to this because they are removed from fund fees; these fees are part of their fund structure and impact the groups or individuals that invest in the fund that invested in you. Becoming an investor has given me insight to the other side of the coin in venture capital—or how all the money flows between VC and their LPs. It has informed the size of fund we are raising today, the number of deals we plan on doing each year, and the role we want to play in those deals. Our intent at Peak Ventures is to align ourselves to our Founders by making deliberate trade-offs: manageable fund size, weighted importance on equity upside, and therefore tighter synchronicity with those we back. Entrepreneurs with significant equity have a distinct advantage in the alignment of their actions to the long-term success of the venture. So, resisting the allure to work for fee and become a glorified attorney (yes, here is my chippy-ness bleeding through) is more likely simply because you have some of the right muscle memory. That tenacity and alignment with your founders will attract deals and jive well with the chutzpah of those you back.
- You’re a fighter and that will resonate with those in the fight. I choose this term not to associate unnecessary bravado to entrepreneurs but from a real experience. In an interaction that my partner had with one of the founders of a company we were tracking, he touched on several points in an effort to win the deal. This founder could have self-funded their way and a few of the points being made weren’t really sticking. And then Jeff made a comment, “You can never have too many fighters in your corner.” It was this comment that finally struck a cord. Here’s why: most investors are passive. Part-timers are busy. Angel investors have poured onto the scene in many forms: current entrepreneurs with some liquidity, high net-worth individuals who have created family offices investing in multiple asset classes, and every other accredited investor who is either directly or indirectly leveraging the unprecedented online access to deals. These angels have other demands on their professional time. Expecting more than the occasional interaction or introduction is unrealistic. The full-timers have to evolve, which can give you a head start. VCs that have been around for awhile have legacy. In some cases, this legacy provides a rocket engine of capital, deal flow, and pipeline to exceptional partners. For many, this legacy is a stagnant prison of doing things the way they always been done, and enjoying a lack of competition (by virtue simply of the growth in VC over the last decade). As with any industry you’ve innovated in, so too venture is an industry… that is changing.
Finally, I’m fortunate to have many to look up and who’ve taken an interest in me and who have long held an interest in helping fund Utah’s startup scene. Blake, Mark, Brandon, Nick, Gav, Ben, the other Ben, Jason & all their teams make for a great active cast of characters in our community. Thank you Mike for sharing your home, your network and for taking endless phone calls J. Most of all, thanks to the man who lured me into early-stage investing—my friend and venture partner Jeff. I haven’t arrived, but if my heartbeat and smile is any indicator, things are off to a great start!
Photo cred: Chris Michel