10 Lessons learned from investing in 35+ startups

I would like to start my blog / medium with this post. It’s a summary of my 6 years’ experience in being active Business Angel and VC. This topic was prepared by me and Marcin Zabielski from Hedgehog Fund and have presented it already few times at tech events. We have summarised our experience from portfolio of Protos VC, Hedgehog and mine as a Business Angel. Each ‘Lesson’ also includes a recommendation for founders to understand VC’s policy and know, how to deal with potential Investors.

So here we go:

1. People

It’s all about people. It seems obvious but I think it’s worth repeating it all the time. I think 80% of success of a startup is the result of the quality of a founding team and ‘human factor’. Business concept and idea are of course important but a team which is going to manage it, is crucial. A good team will be successful even with a very difficult project. They will be able to adjust it to changing market conditions. Incomplete team, or with serious lack of skills or entrepreneurial attitude will get into troubles sooner or later.

I am a big fan of saying: “You are the average of the five people, you mostly spend time with”.

This means, that in whatever project you are into, either it’s a startup or a venture fund you should always sorround yourself with people with same values and ‘business DNA’.

Conclusion for founders:

• Choose partners to your founding team very wisely. Family and friends are often not the best choice.
• The same rule works when dealing with investors. They will become your partners for years. Consider VC not as a company but as a group of people. Get to know them very well before signing a deal.

2. Focus and specialisation

Each enterprise should be good at ‘something’ to gain the competitive advantage. I think, it works for Venture Funds as well. I don’t believe in successful VC doing e-commerce, VR, IoT, Saas, marketplace, consumer mobile, etc. There are of course exceptions (i.e. Kima Ventures) but most of the successful funds have a clear specialisation. Being specialised in certain category allows you to bring much more value to your portfolio companies.

Conclusion for founders:

• Not every VC is ‘good’ for you
• Check VC’s portfolio, specialisation and know-how before signing a deal

3. Values, “Business DNA”

I think that each organisation should represent certain code of values. This is part of the company’s branding and influences the way it’s recognised on the market. I believe a Venture Fund should also have it’s own code and ‘Business DNA’. It influences VC’s corporate governance, way how they work with founders and treat other business partners. It’s important to set rules ‘what we can do’ and ‘what we would never do’. You should be fair and loyal to your values because they build your brand and profile.

Conclusion for founders:

• Get to know ‘Business DNA’ of the fund you are dealing with.
• Best source of that information are founders of VC’s current portfolio companies and its network.

4. Resources vs Portfolio size

If you plan to be a VC that actively helps its portfolio companies and brings ‘real’ value to the table (anti spray and pray concept) you should plan your portfolio and resources wisely. Best results are brought by VCs having between 25–50 companies in their portfolio. Below 25, the chance of hitting a ‘dragon’ company decreases and over 50 can cause defocus. I also believe that max limit of companies being managed by one Partner is 5–6.

Conclusion for founders:

• Check out VC’s portfolio size vs. resources to be sure that they could provide ‘real’ help to you or you will be ‘lost’ in their portfolio.
• Be sure, which Partner is going to work with you in longterm and what are his / her areas of expertise.

5. Follow-on policy

Wise follow-on policy is crucial for a Venture Fund to generate good returns. You should be prepared, that your best companies will face many investment rounds. As a VC, you need to have a clear follow-on policy and plan until which series you are going to invest. It’s said that a ‘healthy’ initial vs follow-on ratio is 50:50. So 50% of your capital should be reserved for later rounds. You don’t want your best companies to be forced to look for money elsewhere because you lack of funds.

Conclusion for founders:

• Understand follow-on policy of the fund you are dealing with. Be sure if they would join your next investment round and on what conditions.
• A lack of follow-on of your fund in later rounds can cause problems.

6. Network, network, network

One of the key values of each VC is its network. It includes limited partners, entrepreneurs, Business Angels, specialists, advisors and other funds, a VC is usually working with. Network is one of the main source of ‘help’ and expertise to VS’s portfolio companies. It is also the most important deal-flow channel. Venture funds often work in certain syndicates and co-invest together. Some VCs create their own Q&A platforms, which include their network and portfolio companies to strengthen the cooperation.

Conclusion for founders:

• Check out your potential investor’s network and what benefits it can bring to you.
• Get to know how VC’s network has helped current portfolio companies.

7. VC’s lifetime and investment period

Startup’s lifetime is on average longer nowadays, as it was few years ago. It’s mainly related to the the fact that more and more companies expand internationally. If you are a marketplace you probably need 3–4 years to win your domestic market. But if in-between your start to expand internationally it can take even 8 or more years, when you would start to think about exit. VCs should be prepared, that their best companies would have a long journey ahead of them. That’s why I believe, the longer VC’s lifetime the better. It allows you to support your companies in long-term, which should also affect your returns.

Conclusion for founders:

• Check out your potential investor’s lifetime.
• Be sure how long a VC can stay with you and what are their
  goals when it comes to returns.
• You don’t want your VC, to push to sell their shares in your
  startup after 2 years, because they are motivated by internal
  regulations.

8. Platform / Competence Hub

I strongly believe that a VC job is about bringing value and all possible help to the portfolio companies. That’s why I am a fan of thinking about a Venture Fund as a platform and a competence hub. So, in what ways a VC can support its startups?

First of all, by building a platform / channel that includes portfolio companies founders, VC’s staff and all its network. Main purpose of that, is to share experience, best practices, solve any kind of problems and overcome challenges, i.e. hiring. Additional way of help that I observed at some VCs is to get partnered with external HR agencies, software houses, marketing and PR agencies, accounting and legal offices. So being able to provide a competence your startup lacks at certain moment.

Conclusion for founders:

• Get to know in detail what support can be provided to you by a VC.

9. Dealflow

Projects pipeline structure and deal-flow management is one of the main internal competences, a VC should possess. We did an exercise to check, what where the channels we got projects from and how many deals we’ve done from each source. We have also benchmarked that with few other funds.

So out of nearly 1500 projects we received, 2/3 came from organic channel. By this, I mean projects that we got on our mailbox without any kind of referral or context. That’s the biggest but least effective channel.

The most important channel is network. So, projects that were introduced to us by entrepreneurs, Business Angels, Incubators that are in our network.

Other two sources are also crucial. So, Invitations from other VCs to co-invest with them and active hunting. ‘Good’ VCs are aware of the market trends and always have a short list of business concepts they are chasing after.

Conclusion for founders:

• Sending your deck to contact@ rarely brings positive result.
• It is much better to reach-out VC through an intro / referall from
  somebody from their network.

10. Fitness Trail / Probation period

This topic is very much related with the first one, ‘People’. If you are a seed fund, you very often meet founders without any entrepreneurial track record. It’s a no brainer to invest in serial entrepreneurs. But, how to asses founders who just start their first startup? Of course, referrals are helpful, but it’s not enough. If 80% of success is related to the quality of the founding team, then you need to collect all possible data to make an investment decision.

I think the solution could be a ‘probation period’ or as we call it ‘fitness trail’. It’s a time that last 1–3 months before the investment during VC and founders get know well each other. On a business and private level, preferably:). So it’s good to start working together on some tasks and challenges. During this time, VC would like to learn how founders think, solve problems and what are their execution skills. A founder has also a chance to see how future cooperation could look like and what kind of support he might expect.

Conclusion for founders:

• If you are a first time entrepreneur be ready for a ‘Fitness trail’:).