#8 – Demystifying Venture Capital, Private Equity and Start-up success

We demystify a whole lot in this episode of Tech DECIPHERED. We demystify Venture Capital and its nitty gritty decision-making processes and operating models. We demystify Private Equity vs Venture Capital and explain the differences between both. We discuss factors for Start-Up success and demystify entrepreneur “ageism”. Last but not least, we disagree … on the Tesla Cybertruck.

Navigation:

• The other side of the table – Entrepreneurs who become VCs (02:31)
• Decision-making and the operating model of Venture Capital (05:10)
• VCs have to make lot of decisions with incomplete information (08:23)
• Are VCs much less ambitious that PEs? (23:39)
• Key reasons why start-ups succeed (31:27)
• What successful second time founders do differently? (43:59)
• Are older entrepreneurs more successful than younger ones? (56:08)
• Tesla’s new Cyber-truck (59:28)

Resources:

• Andreas Goeldi, What I Didn’t Understand About VCs When I Still Was a Founder – https://bit.ly/3bbf4UU
• Auren Hoffman, Venture Capitalists are MUCH LESS ambitious than their private equity siblings – https://bit.ly/2V5itin
• Alex Ponomarev, The Five Reasons Why Startups Succeed, According to a Legendary Investor – https://bit.ly/34wQuLy
• Feliks Eyser, What Successful Second-Time Founders Do Differently – https://bit.ly/3b86aYn
• Mark Travers, For Entrepreneurs, 45 Is The New 25 – https://bit.ly/3a3ypWz
• MotorTrend, Tesla Cybertruck – https://bit.ly/2V6jSoY

Our co-hosts:

• Bertrand Schmitt, Tech Entrepreneur, co-founder and Chairman at App Annie, @bschmitt
• Nuno Goncalves Pedro, Investor, co-Founder and Managing Partner of Strive Capital, @ngpedro

Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news. 

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Full transcription: may contain unintentionally confusing, inaccurate and/or amusing transcription errors

Intro (01:24)

Bertrand: Welcome to Tech Deciphered Episode 8. 

Hi, Nuno, how are you today?

Nuno: Hey, Bertrand, how are you? I’m well.

Bertrand: Pretty good, thank you, Nuno. 

So, what are we going to discuss today?

Nuno: So we’re gonna discuss a couple of different areas. 

One, we’re going to demystify VC: a couple of articles on the venture capital space and we’ll agree with some of the points made, we will disagree with others, we’ll again go in depth and try to demystify the discussion. Then some other articles on de-mystifying startups and founders in particular, and what it takes to be a successful entrepreneur.

And finally we’ll talk about gadgets and we’ll talk about cars today, which is really, really cool.

Bertrand: I know you are very excited.

Nuno: I am super excited. We only have one article on cars, but I think we can go on for some time.

Bertrand: And which car are we going to talk about? 

Nuno: We are going to talk about the cyber truck, that thing that does Tesla announced.

And we’re going to talk about other stuff that’s cooler and what’s happening in the space.

There was a recent announcement as well, of a couple of new electric cars, and so we’ll go a little bit off piste on that one.

The other side of the table – Entrepreneurs who become VCs (02:31)

So, let’s start with our first topic today , and we’ll start with this good article, from Andreas Goeldi,  titled “What I Didn’t Understand About VCs When I Was Still a Founder”. It’s great that he’s coming with his perspective having been a founder, an entrepreneur, now on the venture capital side, and being able to relate, in a way, more easily, from a founder perspective, entrepreneur perspective what it is to be a VC. 

And let’s go point by point on this one. So the first point that he makes, I agree actually with all of his points. I think there’s some nuances around some of the explanations and rationale that he’s giving that I would like to elaborate a little bit more. I do think he misses a few points in his rationale certainly. 

So the first one is VCs have a limited attention span because they have to context switch so often. 

This is true. We have to context-switch a lot. And actually it’s a little bit broader than that. Sometimes if you are, even in a thesis driven venture capital firm, it’s likely that’s you’re looking at different sub-industries.

You could be meeting someone in construction tech in the morning and meeting someone in the retail space in the afternoon. You could be meeting someone who’s direct to consumer in the morning and someone who’s B2B to see in the afternoon. So you do have to context-switch, not only in the sense you’re meeting different companies, very different stories, sometimes even different stage of development.

But actually you have to interact with sub-industries as well that in many cases are very different. And sometimes you get sub-industries that come through the door that you haven’t necessarily spent a lot of time on. They might match your thesis because there are somehow, for example, direct to consumer or B2B, but they might not match necessarily the industries where you spend most of your time.

And so that amount of context switching is pretty important.

Bertrand: Yes, I’ve spent more times these past few months meeting with a lot of entrepreneurs,  investing in a few startups, advising some VCs. And  probably one of the fun part actually of being a VC, is to see so many different industries, so many different type of business models. And hopefully from that you can form better judgment.

Nuno: Yes. And if you have a top of funnel, he mentions his own firm: 3,500 to 4,000 pitch decks in any form. So I normally talk about this as top of funnel: which might mean a pitch deck that is sent to us inbound, it might mean a first call, it might mean a reference from someone, but really the top of funnel. 

If you’re seeing 4,000 – 5,000 different companies a year, and let’s say you’re making five to six investments a year. His firm does do more than that, they do 20 to 30, which is quite a lot, certainly on a yearly basis. You know, the funnel is very, very steep, which means not only there’s a lot of context switching, but there’s a lot of attention that you need to pay to the companies. We’ll come back to that below. 

Decision-making and the operating model of VC (05:10)

He makes another point on decision-making and why it is so important to get decisions right, that links maybe better to the funnel and the drops off from the funnel. One thing I’d like to add as well, often hear entrepreneurs complaining to me saying: well, these partners are always speaking at events and there’s always shindigs and all this stuff, and they spend money, and all these different things that they do.

Well, that’s part of being a venture capitalist as well. And the reason for that is, certainly in a very classic playbook of venture capital, you’re attracting,  startups to you in many cases, inbound, which means you need to have a brand, you need to create a brand. You need to be known to the market for something, either because of your thought leadership or because you participate in events or network a lot.

Or is it because of your circles of influence that are present in your team? The access you have to different types of alumni networks, the different types of academia, institutions, et cetera. But people end up spending a lot of time doing these events, talking publicly. I personally talk a lot in public, not because we don’t have better things to do, but because we do need to create brand and we do need to have people recognize us for something.

Otherwise it’s very difficult to attract inbound deal flow. And that also means context-switching because we’re not just context switching between startups and companies. We’re context switching between speaking in public, writing an article, being at an event, networking, we are context switching as well in the case of many VC firms, between sort of operations where you need to manage the day to day, hire people, manage the office.

A lot of these VC firms are small, so you literally need to do everything. A general partner might have decisions in a day that go from: should we buy more paper or not, to shall we invest in this company or not? So it seems very glamorous all the time, but it’s actually like a tiny little startup that really manages a lot of capital at the end of the day.

Bertrand:  And to be fair, each firm will have a different strategy. Some have been historically very secretive, more a Sequoia type of approach, and even them, they have changed over time, while some other firms, especially newer ones, ones that have established themselves in the past 10 years have to demonstrate more who they are. If you don’t have 20 or 30 years of history, you have to make yourself known and spend some time, building a brand, and not just building a brand. For entrepreneurs, what you see coming from the partners should hopefully give you a good sense of who they are, what are their thesis, what is their approach to business. And hopefully, as entrepreneur, you can make a better pick and a better choice, initially based on that.

Nuno: There are very, very, very few venture firms that are staying off the press these days. You mentioned Sequoia, Sequoia’s more and more active, certainly more than they were five, 10 years ago. The only ones that occurred to me that are really still relatively away from the limelight but really more open in the last five years then they were before, would be a Benchmark. I would say probably Sutter Hill continues not being in the news at all, and it’s one of these really old firms that a lot of people don’t talk about that all, but with incredible track record. But there’s really very few venture firms that are really off the limelight. Accel has stepped back from the limelight quite a bit, but I think they’ve also started focusing a lot more on what I would call, a Series A, Series B that are very large Series A, Series B, almost like Series C, Series D, so maybe because of their focus, they don’t need to be as present in the market. but there are very few firms that have stayed away from the limelight recently.

VCs have to make lot of decisions with incomplete information (08:23)

Bertrand: So maybe, another point is: his point around VC have to make a lot of decisions with incomplete information. And that’s why they are eager to get any data point they can. 

Nuno: Totally true. In particularly in early stage, if we look at early stage, there’s very little data available. And let’s talk about different types of data. There’s the data that the company can supply us with, which normally is primary data on their own business. How are they doing if they’ve already launched, what’s their roadmap? Obviously it starts with a pitch deck, or with a teaser, but it normally goes into a lot more details. 

You know, what’s their financial plan look like, what their actuals look like, what their cost base looks like, you know, what their use of funds, if they have users, how are the users behaving, you know, analysis on traction, retention, engagement of users.

So there’s all these things that they can supply to us in terms of primary data, and normally entrepreneurs find it really strange if we ask them, by the way, do you have an analysis on competition, can you supply us with any markets  analysis that you’ve seen, et cetera. 

They find it really strange. And so normally there is a couple of reasons for that ask. One is we are actually evaluating the team as well, in that we’re trying to understand whether they’ve done their homework, whether they actually know who their competition is. Because we are certainly going to do that outside in. And I’ll come back to that in a minute.

So we want to know that you know who your competition is, because we are going to have an assessment on that. And if it’s really not matching, if you’re not seeing your biggest competitor right now, then you sort of have a problem. You have a huge blind spot. 

Bertrand: And sorry, even if you see them, you want to make sure that you are realistic about the state of your competitors. I mean, I’ve seen so many competitive analysis where the startup, 5 people, 10 people, everything is green, everything is “check”, up and to the right on the chart, and the more established business who raised $50+ million has everything wrong.

And that for me is also sometimes a bit scary. I think you have to be very clear and honest about: what are the strengths, true strengths of your competitors, what are your true strengths. But you cannot be all good and your competitors all bad, especially if they are bigger and more successful than you are, at least today.

Nuno: you have real information on these companies? Many of them are probably VC backed. They’re private companies. So this information is not readily available. Do you know what they’re doing? Right? Obviously above board, right? We’re not asking about industrial espionage, but do you know what these companies are doing?

And if you do, that’s a real big plus because then you’re fully aware of what they’re doing. You’re keeping an eye on them and you actually know that they matter. It’s not that you’re competitor driven, but at least you know who your competition is. So that’s normally one of the asks, that we have from founders.

The second reason why you might have this ask from certain VCs, it might be an industry that the venture capital firm is now looking at, they may have not looked at before. For example, we did some inroads into construction tech last year, and this was an area we haven’t spent a lot of time on. So obviously we’d read reports between the time that we decided we were going to look at it and the first meeting we had with startups. But at the end of the day, it’s interesting to see what else is there and how the industry works.

And so we are also learning a little bit on the job. And that’s part of being on the job. That’s more of what we ask normally from the startups. On the other side, you have our own analysis, and again, a lot of entrepreneurs, forget this: if you’re a good VC firm, you’re going to do your own analysis.

You’re going to do your own outside in analysis, mostly with secondary data, right? We would get data from whoever’s out there that can supply us relevant data points for what we’re doing. For example, it could be App Annie data if there’s, you know, mobile apps involved. It could be,  PitchBook information if it’s really linked to the company and competitors in terms of funding, fundraising, investors, et cetera. Crunchbase would be another source. 

But we will look at different data sources of analysts in the space, to really assess a couple of things. One, the competitive dynamics in that market Two, how big is the market and how is it growing? And is this the real market and what are the real mega trends of the market. And three, where do you stand effectively on that market? Are you already recognized in that market or not? You know, are you really coming in, and there is a lot of  opportunities and a beachhead for you to enter that market. Or not. 

So for me just to understand this notion that, the decision making and why we ask as much stuff as we can, is ultimately we need to make one a fact-based decision. We need to be able to compare you not only with your competitors, maybe in some cases also with other companies that are in similar cohorts or sub industries. And certainly we’re looking for the right metrics to do that under. And we need to do that within the context not only of the secondary data that we can get ourselves, but also the primary data that gets applied to us by the company.

Bertrand: And maybe, of course, one reason VCs think carefully about investment decisions is that, it’s very hard to reverse. Actually, it’s probably impossible  to reverse , so that’s something to take into account. And the opposite is true, as a founder the decision is also very hard to reverse. So, taking time through these discusions or fact gathering activities to learn more about the VC, how they think, how they work, can be a very useful time to make a better decision on your future  financial partner.

Nuno: And just to sort of amp up that point because I think it’s a very relevant one.  You know, asking the VC firm what they’re still thinking through, what their process is, how are they’re basically collating all this information. Do they understand my business, the venture capital firm, and the people that I’m talking to, do they understand?

Can they bring value to my business once they’re in? Particularly if they’re taking a board seat. Do they understand my market? Can they understand my market or are there other things they bring to the table? Maybe they don’t understand my market really well. They can help me with hiring or they can help me with business development.

Or do they understand really well consumer acquisition, retention, engagement, or they understand really well product, but why am I going with this VC firm and not another, to your point, is very relevant. And this process of due diligence is a dance where it’s very easy for the startup to fall prey of just supplying things and not really engaging in the discussion with a VC firm.

And it’s a great opportunity to engage in the discussion, and to really figure out if these are the right longterm partners that you’re going to get on board.

Bertrand: Yes, and I would say for me, it’s quite key when as an entrepreneur you work with VCs. You pick a VC that basically has an overall high level understanding and liking of your business and business model. It’s normal that the VC in front of you doesn’t know everything about your specific industry or business or competitive environment. But overall, let’s say you’re in construction tech, if you have to convince a VC on the other side that this is a valuable industry, this is an interesting one, this is something where stuff are happening,  you shouldn’t be doing only so much convincing, I believe, because at some point that should also be a fit for “Hey, let’s hopefully find investors who have already put some thought in that space, come with a positive bias around that space.” 

Nuno: In terms of the valuations in the same example of a company that has raised $10 million on a $100 million valuation,  it is true that they probably haven’t attained this valuation yet and that this is sort of a forward looking valuation, maybe in two years or three years now, if that gap is not two or three years, if that gap is six years, it will be very difficult for this company to attain not only the valuation that they’re given today that they’re recognized on today, within the next two or three years, but also to raise the next round.

Because whoever comes next, like you’re not worth that. You’re not going to be worth $200 million or $250 million. And that’s why you start having what we call flat rounds, where your valuation stays flat from one moment to the other, meaning the pre-money evaluation at your next round is the same as the post-money evaluation at the round before.

Or down rounds where you’re pre-money valuation might even be a little below the post-money valuation of the last round. So in this case, for example, let’s say the company raised at a $100 million post, and in the next round, they can only raise at $70 million pre or something like that. So, the logic of this is: be very careful and conscious of the valuation you’re raising at, what the expectations are, when will you need to raise money again? How much money is enough for you to get to that point in time when you need to raise again. 

And obviously the advice that’s always given to entrepreneurs is raise when you don’t need to raise, but just be careful in raising when you don’t need to raise because it does create dilution, it does create expectations, it does create higher valuation. So, just be very aware when you raise of the weight you are willing to carry with you in the same analogy of basically carrying stones with you.

Bertrand: I definitely agree with you. Maybe as a last point, because I’m not sure if I’m in full agreement here with this article, his point is that VCs like to take time, to make their decision, because from his perspective, it’s a good idea to do so. I would say yes and no. This article is coming from a European investor, and I’ve been in Europe, I’ve raised money in Europe, and maybe it’s less true today, but in the past, it used to take you 6 to 12 months to raise money. And 6 to 12 months is a crazy long time: your company can die multiple times, there is no way you can prepare a business plan for one year wait 6, 9 months, or 12 months to get the financing and hope to make your targets for the next year, if that’s what you need.  And so I’ve seen investor who just: yeah, just hope for the best during that time and either companies do great, and then they have validated their thesis or they are not doing so great, and then maybe opportunity to invest cheaply,  or not invest intimately. 

But my point is that, I don’t think that’s right. You cannot run the business like this. You need to move with speed at every level of your business, from recruiting, to selling, to getting financing. And so, I think there needs to be a balance: yes, it might be too short to do stuff in a week, if you have never met the investors the first time, but I can tell you from my experience have been closing rounds from first pitch to term sheet in as short as nine days and basically a few weeks with some other investors.

And usually it was with investors I met once or twice, or three times, six, nine, 12 months before. So, it was not truly first meeting, but it’s really the time between the true first pitch for a fundraising to getting a term sheet. And after that, it’s the usual 30 to 45 days to finalize  closing documents. And I must say that pace as an entrepreneur is very important because that way your business is not suffering of the time you’re fundraising and not focusing 100% on running the rest of the business.

So, it does a lot of positive, you limit distraction. At the same time, that’s true that you probably want to take time to know your investors, get a good sense about them. But again, having learned my lessons with European VCs,  at least the old days, let’s please be careful about not spending too long either.

Nuno: I would say on average and on median, you’re not even close to be on average or on median. So it’s like you’re super fast at raising. I’ve told you this a bunch of times before, which is very impressive. And it’s also true that you probably raise at moments where you didn’t necessarily need to raise, which also changes a little bit the shift of power , and how it is raised.

So it’s an incredible case study, I think to be honest, if people ever want to spend time with you and probe you on how you do it, but I don’t think that’s in any way the average or median to go from first pitch to term sheet in the industry. 

I do agree with you, 6 to 12 months is slow death. So totally agreed with that point, but clearly  it’s going to take some time. I always give the estimate of four weeks, six weeks, if we’re talking about a true term sheet, not one that you walk away from, but if you’re talking about a true term sheet, you know, and if it’s an industry that maybe you’re spending a little bit more time on, I would say four to six weeks.

If it’s an industry where the VC has spent a ton of time I see you can go much faster and you can do deals in, you know, at least put term sheets at the table in one to two weeks. But again, the one to two week is not the norm, it’s a little bit more of the exception at the table. 

Representing a little bit the VC mindset.

Why is it worthwhile to slow this down? Some of the points are already made in the article, but two things. One, at some point you need to justify your investment. Not that you need to justify to your own investors, which we call limited partners in venture capital, but you’re going to have to have an investment memo of some sort that justifies, why did we do this in the first place?

You need time to craft it, you need time to polish it. You need time to have something that you know, at some point if the limited partners come back, is like why did you make a decision on this company? And you spent all this money and the company failed, that you can at least justify it. And obviously failure’s part of venture capital, but still you need to have that memo well done.

The second thing that a lot of entrepreneurs should be aware of is in some cases. We are delaying the decision because we do want to see numbers. It might be that you just launched and you know, to be honest, I’d like to make a decision two months down the road. Not right now. And so delaying a little bit the decision from the perspective of the VC, if it’s not a hot deal or if it’s not a deal, we have five VCs at the table fighting for it, is something that’s needed by the venture capital firm to really take away some of that early risk.

If you’re coming to a VC saying, I haven’t launched it, I’m launching in three weeks. I can bet you most VCs will be like, yeah, let’s continue talking, but they will wait for the launch, right? Because why would you not? And if you don’t launch in three weeks, then that means something else. It means you weren’t ready to launch and actually you’re giving us a roadmap that’s not totally true. So there’s a little bit of this game as well in timing, in venture capital. And sometimes you can get away with it. Sometimes you can’t. Sometimes you run into a hot deal and you need to make a decision in three days. Which has happened to me in the past, and you need to somehow see if you really want to get in the deal and if it’s a deal for you, and how do you do at least the high level due diligence in three days, and how do you get to the table and are you ready to write a term sheet or not?

But timing normally is really a very, very important lever in this process.

Bertrand: Yes, it’s definitely a dance between entrepreneurs and VCs.

Nuno: One last point maybe, on the “no”, on why VCs don’t like to say no.  VCs don’t like to say no for a variety of reasons. It’s tough to reject companies and you have to reject hundreds of companies on a yearly basis. We have very specific rules, certainly at the VC firms I normally work on, which is normally the most senior person that was on the deal will write the refusal or the rejection, either through email or do a call with the entrepreneur depending how much time we spend together. We will try to justify, certainly at a high level why we’re passing. 

And then a lot of people ask me, why don’t you give very detailed analysis. Well, if you give very detailed analysis, two things are going to happen. One, you’re going to get into a fight with the entrepreneur because the entrepreneur is going to push back on your assumptions that have led you to pass on the deal. And you certainly, you don’t have a lot of time to do that, right? Because again, we’re seeing hundreds of companies a year. 

And the second thing is you’re creating effectively what I call this notion of you’re sort of potentially pissing off the entrepreneur, which for a VC is always a bad idea. I want to make sure that even if I passed on you as an entrepreneur, you don’t have a negative opinion on me because you might have access to other  VC investible startups that you might want to send my way.

This company might not work and you might do another startup next that I would like to talk to you about. And so that’s a little bit the two or three core reasons why VCs don’t like no.

Bertrand: And you might want as a VC to come back for the next round.

Nuno: Of course, that’s a really good point. You might  want to come into the next stage and still be on their list of people to contact, even for the same startup.

I see a lot of VCs that don’t say anything at all. I do think that’s a really bad practice. And so for me, saying no is part of treating an entrepreneur and a founder in a proper way.

Bertrand: I agree with you, as entrepreneur, you always want to know more, but at some point knowing too much, knowing how the sausage is made in a way doesn’t help you that much, actually.

And my best investors were usually investors that, I met the round before. And, it simply was not the right time at that time. But then the next round, they are ready, they know well the business. They have seen how it has evolved. They have seen the result, and now is the right time. And it’s good to really keep good relation just for that reason and understand that it’s not a fight. 

Nuno: Absolutely.

Are VCs much less ambitious that PEs? (23:39)

The other article we were talking about in demystifying venture capital, is a submission by Auren Hoffman. The title is venture capitalists are much less ambitious than their private equity siblings.  I have a number of objections to this analysis. I honestly don’t know the facts behind it or not.

There’s potentially one or two things that I could agree with, but let me start with the things I don’t agree. 

The apples and oranges comparison starts with, for example, vCs normally are partnerships only, they don’t have a CEO. They talk a lot about operations and how to build operations, and VCs don’t really build much operations, whereas private equity firms do. Talking about expenses and frugality, and non expenses, and the expenses in VC being very high. 

I think there’s a lot of anecdotal evidence here, but let me sort of address a few of these. The notion of having CEOs in private equity and not having it mostly in venture capital has to do with a couple of very important differences between both sides.

Private equity firms normally have a lot more assets under management. They’re larger funds because they’re more mid to late stage focus in some cases, even focused on late stage alone. Whereas venture capital firms are normally more focused on the earlier stages of investment and therefore with less assets under management. Assets under management are important because you pay salaries of people and operations with management fees. And so if your management fees, let’s say are 2% or 2.5% in venture capital, and let’s say in private equity, they’re between one and 2%. So it seems like private equity has less management fees. Well, but private equity has one to 2% of billion dollar funds. Whereas VC, let’s say, would have two to 2.5% of let’s say a hundred million dollar fund.

So very different numbers, which means that 95%, for example of all VC firms in Silicon Valley, have less than 10 people just as a very core stat and private equity firms normally you have more people, which means you have a lot more operations shared services, sometimes operating partners, et cetera.

The second thing is the nature of the business. Private equity firms invest mid to late stage, either as minority investors with significant strings attached and as senior investors. Or they invest as buyout players where they just take over the company. So they have total control over the company. And therefore, again, they need to have a lot more operations.

So why do they have a CEO? Because they have a much bigger team to manage, right? And so it makes sense to have someone that focuses not just on deal making, attracting deals, et cetera, and then doing ad doc, all the rest of operations. But you have to have someone that actually makes sure that the operations are getting properly done.

In some cases you have a lot more investor relationships because their funds are bigger, so they have to deal with bigger investors and therefore the CEO also has to do that. So the differences in the apples and oranges that are here, I don’t think make any point for less ambition from the VC side versus private equity.

Just very apples and oranges comparison for me.

Bertrand: Yes, and also you could argue that:  what is ambition about? Because most PE firms, it’s not about changing the world, it’s not about making the world a better place, it’s not about radically transforming industries, and that’s fair. Not everyone can do that. But it’s more, around let’s optimize, let’s fine tune, let’s provide liquidity. It’s not about creating these brand new spaces. So, it really depends what you want to do also in life. Is it more focused on financial management? Because at the end of the day, as a PE firm, that’s a lot around, financial management,  but also,  as you said it’s sometimes taking over the company, and running operations .

And I don’t think many entrepreneurs will be excited to see VC firms, come and takeover their company, and run it for them. So that would be a total mismatch, between entrepreneur who wants to develop by themselves their company, their business, and investor who want to take too much control of the business. So, I think in a way the VC business has adjusted itself to that reality, by proposing minority stake, by not trying to run the business for the entrepreneur, and also by staying human size, as a business, to stay closer in a way to their clients, the entrepreneurs, the startups, and making sure there is not too much of a gap on how you behave, how you act , and ultimately what type of business are you running. 

Nuno: So I’ll say something positive and then I’ll say something negative to end up on. From my perspective on this article.

The something positive, I think to Auren’s point. There isn’t many times in the venture capital space, with VC firms, the ambition of creating larger organizations that will scale through time, creating the next Sequoia, the next, you know, organization that will have maybe multibillion dollar funds like an NEA.

I do think sometimes, venture capitalists lack, that, ambition and part of lacking that ambition is they’re very focused on the deal. They’re not focused enough on the operating model of the VC firm. How do they distinguish themselves from others? And they follow in many ways, in a lemming manner, the playbooks that many others have followed before the brand building, the networking, the “they will come to us” model, which in some ways, and as you know very well, I think doesn’t work anymore, it won’t work very well in the future. So to Auren’s point, I think that point is taken. 

Just to end on maybe a little bit more negative angle, the low salary piece.

I don’t know which VCs he’s talking about, but I’ve seen even recently, some numbers on the U.S. on median pays and average pays and what constitutes 75th percentile and what’s constitutes 50th percentile, et cetera.  VCs, General Partners and principals was the data that I looked at. They can make a lot more money doing corporate things.

A VC on Sand Hill road could go to Google and make more money in terms of cash comp for sure on a yearly basis. If there were just a Director at a Google or Facebook, than they would in venture capital. There was no doubt in my mind. So this is really about the upside. They take actually lower salaries, even with bonuses.

And VC firms don’t pay much in terms of cash bonus, unless they have a lot of assets under management. Some VC firms don’t even pay cash bonus. So again, I think this is a little bit like, well, they’re not leaving money on the table. As an entrepreneur in venture capital, I can tell you I’ve left a lot of money at the table instead of going to the corporate route.

And so I do object a little bit to this point. I do think that the entrepreneurs that are in venture capital, the people that started their own VC firms, and even in their second fund, many cases are not taking very significant salaries, could take much higher salaries if they were doing something else.

Bertrand: Yes, I guess it’s like entrepreneurs. Some entrepreneurs can take a higher salary in some occasion. But I agree. I think there is that big difference between are you an entrepreneur in VC and starting your fund, because if that’s the case, first fund, second fund, I mean, initially, it’s a pretty painful road, actually.

Nuno: Yes. The point he makes is like the trade off, which is they take the 2% management fee and they pay themselves a salary, the VCs, and they could use most of those 2% to build the operations and everything that’s involved. What I’m already saying is when they take a salary, the salary they’re taking is normally already a much lower salary than they should take.

So again, you know. It seems a little bit of an apples and oranges comparison. I don’t want to totally dismiss the article. I think the broader point of lack ambition in building operations, building a big franchise play, I think is a fair one. I do think a lot of the analysis he does is, at least anecdotal to say the very least.

Bertrand: Yes. And, as we know, as a VC your returns, your carried, which is the true upside, it might take 7, 8, 10 years actually to really be there. So, would an entrepreneur refuse to pay himself market level salary during 10 years, I don’t think so either.

Nuno: I was talking to a General Partner today. I won’t say the firm, and he told me it took him 10 years to get his first carry check. I was having a discussion a couple of weeks ago with another General Partner. It took him 12 years to get his first carry check. So for example, if you get your first carry check within six to seven years, that’s really, really good.

Six to seven years. And you might not get carry at all. I mean, VC firms also fail, right? So it’s not like we’re not like entrepreneurs or startups. 

Bertrand: Not everyone is 25 percentile.

Nuno: Yes 

Key reasons why startups succeed (31:27)

Bertrand: So, Nuno let’s talk from an entrepreneur, founder perspective, and what are some of the key success factors. Let’s start maybe with the first article, from Alex Ponomarev about the five reasons why startups succeed according to a legendary investor, Bill Gross. 

Nuno: Well, by order of importance, Bill in his talk, talks about five reasons why startups succeed and he starts with the least important one, which is funding. And, I was a bit shocked when I saw least important is funding. Because normally you  obviously fail because of funding. They can’t raise money.

But I do understand the point he’s trying to make. The point he’s trying to make is not funding itself because there’s more important items down the list, that he mentions that really make the difference between a successful or non-successful company.

Bertrand: Actually, I like that part. I mean, it’s not a question of liking you could argue.  Hopefully, it’s an analysis based on some years of experience. But I think it’s a classic chicken and egg problem. Do you fundraise because you have great metrics? Or do you fundraise in order to get to great metrics?  And for sure, it’s much easier and probably better for the long run if you’re fundraising based on the back of great metrics.

I guess, we have all seen what happened when, the opposite  is in place, like a WeWork,  where you have a machine to fundraise based on some very suspicious type of data or KPIs. And I think the other way around, if you have great KPIs, great data, I think you’re ultimately building a business for the long run. And from there, it’s for you to decide if you want additional fundraising. And you might not need given your industry or you might not want, and it might be a good reason or a bad reason. Ultimately, I truly believe more or less financing depends on the competitiveness of the environment and