On Human Capital & Venture Capital

Brad Feld wrote a fantastic post today entitled Too Many Seed Investment Choices.  It’s a post that’s been circulating in my head as I’ve met with companies over the past 6 months.  The best VCs are the ones that balance their optimism, vision and enthusiasm for startups with realism based on very real constraints (the primary one being his/her own time, but also includes market development and exit timing).

As an entrepreneur at heart, I often innately grasp the potential of entrepreneurs and ideas that I meet with.  My head starts to spin with the big vision, of how we could collaboratively build a great company together.  However, the reality is that I am building a portfolio of investments and, like Brad, I believe in being an active and helpful investor.  This takes a lot of time. Money is fast turning into a commodity.  It is the human capital involved, both internally with company teams and externally with advisors, boards and investors, that is going to differentiate which startups survive and become the disruptive businesses of tomorrow.  These days, I am seeing a large number of first time entrepreneurs with great ideas, which is fantastic to see.  There is inherent risk taking when you haven’t done it before, which often leads to true innovation.  However, this needs to be balanced with experience to navigate the obstacles that may arise, as well as introductions that can help scale the business faster.  We are moving at light-speed today — and every step counts.  Too many pivots, and you can lose the market opportunity, even with the greatest idea.   No matter how capable and experienced, an entrepreneur needs as many trusted, networked and experienced eyes and ears to help her navigate through this dynamic market.  This is why, while I have ownership targets when I invest in companies, I evaluate each investment independently.  If there is an opportunity to bring in a syndicate partner that will add exponential value, it would be foolish to not include them.  I’d rather have smaller ownership of an exponentially larger pie than larger ownership of a smaller pie.  This is also what I advise entrepreneurs when discussing dilution and valuation — think of the bigger picture and the end game of what you are looking to build — and who will help you get there.  Additionally, while we are in a very bullish funding market, this will eventually change (having invested through the boom and bust 1999-2003 in Silicon Valley and the run up and financial crash of 2004-2009 in NYC, I can virtually guarantee that cycles will continue).  It is the downturns and bumps that separate the dedicated, long-term investors from passive ones — and entrepreneurs should keep this in mind as they build out their syndicates.

So as an investor, I find myself passing on opportunities at the early stage that I know could become strong businesses, simply due to bandwidth constraints.  In those cases, I try to make introductions to other investors and be helpful in providing feedback, and potentially invest when my bandwidth opens up.  Luckily we now have a vibrant ecosystem of investors with different investment strategies that can step up.   It is important for entrepreneurs to understand these dynamics and differing investment strategies, and know that just because an investor doesn’t invest at a given point in time, doesn’t mean s/he doesn’t believe in the company’s vision or potential.

My (very rudimentary) graph of the relationship between human capital and financial capital in a company’s evolution.  In early days, the network effect of employees, advisors, investors is key to gaining market traction and scale: