The job of a VC looks extremely enviable, and lots of people would give their right arm to become a partner at a VC firm.
They’ve got lots of money to invest; they fly all over the country; they are invited to give lectures at conferences; they get to hobnob with the rich and powerful; they are featured in the media as being the top rung of the startup ecosystem; and they interact with smart founders who woo them in order to convince them to fund them. They make tonnes of money, and every time a startup becomes a unicorn the VC gets to share in their financial success. While lots of people envy them because of their deep pockets, the job can be very stressful.
This is because a VC is only as good as their last success.
The reality of the beast is that most startups will fail. When they back a company which folds, they end up burning tonnes of cash, and they then have to provide an explanation to their limited partners (the investors from whom they’ve raised the money) who are going to give them a hard time, especially when they want to raise their next fund.
Even worse, when they pass on a company which then goes on to become a billion dollar success, they beat up on themselves for missing such a great opportunity. This means they have to live with coulda, woulda, shoulda, and near misses all the time.
Success v/s Failure: The VC Balance Trick
While it’s fun to be a VC when your startup succeeds, you have to spend far more time analysing all your failures (which far outnumber your successes). The problem is that the human brain is wired in such a way that the unhappiness which is caused by a loss is far more than the happiness which a comparable success causes. When the startup is successful, you sell it to a PE firm and you move on, but you’re always stuck with your failures because you can’t get rid of them.
VCs are smart, but they have to be on their toes all the time because they are competing with other VCs who are equally smart. It seems that a VC has a lot of freedom and power, and it’s every founder’s dream to get funded by a VC – after all, raising a Series A is the first stepping stone to success.
However, the reality is that a VC partner is a professional, and he does suffer a career risk in case he takes too many “out of the box” bets. This means that while he’s encouraged to take risks if he takes too much risk, he may end up losing his job, and it’s very hard to find the right balance.
Does he follow the herd and invest in the sector which happens to be the current flavour of the month because all the other VCs are doing so as well? Does he hunt for a “me-too” startup, or does he strike out on his own path and look for unconventional founders?
Since there’s so much money at stake, it can be hard to make the right choice, and this dilemma is something which keeps VC partners up at night.
Why VCs Say No
The major reason you should empathise with the VC’s dilemma is because of the number of times they’re forced to say no to so many bright entrepreneurs.
By the time a startup has scaled up to the stage at which it’s ready to raise a Series A from a VC, the entrepreneur has proven that he can run the company successfully. His business model generates revenue and he’s established product market fit by establishing traction. When he pitches to a VC, he’s in sell mode and is going to paint a very rosy picture of the future, because he wants money from the VC to help him to catalyse his growth.
His growth is arithmetic and he wants it to become exponential. Many of these founders are so smart that you can’t help but fall in love with them, so I’m sure it must be breaking the VCs heart when they have to say no.
They don’t have unlimited funds, and they can’t yes to every smart founder who comes to them. When you are forced to say no to so many passionate founders, I’m sure they feel bad because they’ve not been able to help that founder to grow his company. It’s never easy to refuse a passionate founder who wants to change the world, especially when his startup is doing a great job.
This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.
