Managing Emotions and Incentives as a VC
Eight blind spots from the front lines of early-stage investing.
As I reflect on my first 6 months in venture investing with Crossbeam, one of the most challenging parts of the job, by far, has been “saying no” to founders and ideas you really love. The best founders generate a sense of excitement – when a 3 PM pitch sticks to you at 9 PM and 8 AM the next day, it’s a unique feeling.
This past month, I met such a founder. The person seemed to “get it” – knew the industry cold – had the right story and tools in place to make it all go up and to the right within a short period of time. Their energy was/is contagious, and you just can’t stop thinking about them and what they’re about to build.
But is the story actually true?
Insight #1: A lot of venture investing is a process of “assumption verification” – and this entails work.
It’s very easy to just hop on phone calls, gather insights/notes, and call it a day, instead of going through public filings and/or earnings calls of an incumbent in the industry and learning how they think about the world. The latter takes more time, is more frustrating (they don’t always have it laid out in the easiest format) and can lead to more questions than answers… Which starts another cycle.
But it’s in our DNA to do it.
Insight #2: The concept of capital stewardship as a guiding star.
The hours get really long. Sometimes days drag on for 16-18 straight hours of zoom calls and diligence. But remembering I am a steward of capital is one of the things that keeps me going. I am a junior associate at a small organization – but my work matters. Our investors, and by proxy, retirees and the insured for example, depend on our capital allocation skills to protect and grow their money. It’s a big deal, and that is worth remembering each day.
But back to that founder… You really, really love this idea and this person. They have managed to charm the daylights out of you and you really don’t want to let them down. So you actually work harder to discover the truth – not only for you, and the capital you’re managing, but also for them because their manners, energy and thought process have impressed you so much.
Insight #3: They have managed to charm you - this is an important data point.
When someone is charming it makes them good at raising capital -- capital creates optionality and room for error so that a founder can take a big swing, and raise money to support a mission that may take years to realize. Ceteris paribus, these founders will hire better, manage people better, fundraise better, and dig themselves out of sales / other operational challenges better.
Insight #4: But something still doesn’t add up about the business itself.
As you dig deeper, a few red and yellow flags emerge. But most you can live with, and those risks just net against the merits of the deal. Somebody, usually a potential customer, tells you something that could be problematic.
Being objective here gets harder and harder – remember you really like the thesis and the founder – so this is when you start getting tempted to a) underwrite a potential pivot b) think about what the founder should do instead of what they want to do and/or c) dream up scenarios where you have to underwrite a major shift in behavior or industry dynamics.
Not that a, b, or c cannot be right on their own – but now you are getting into dangerous territory. This brings me to the next insight:
Insight #5: Remember what your job is – what you earn your fees for – stay in your lane.
While all this is going on, there is another dynamic at play in the background. Remember you’re the one running point on the deal – you either sourced it, or you have taken ownership of doing diligence on it. You now “own” this deal at your firm. This is incredibly scary as a junior VC – because it can put you in a situation where you have to take real risk you’re perhaps not “ready” for. We get “paid to take risk.” But taking risk takes time to get used to. Especially when it’s with millions of dollars.
Insight #6: You have to be able to take risk and defend your position…
But when you are not able to sufficiently defend your position at Investment Committee, you have to reflect on incentives.
Insight #7: Sometimes the best decision for your personal career in the short term may not align with the best interests of your investors/shareholders. This is when you have to kill your own deal and be able to live with it.
Getting attached is human nature, but getting attached at an early stage, where oftentimes you do not have hard numbers to point to backing up your pass decision, it gets harder.
But you are still able to read the room on calls with your Partner(s), and this is when you develop a point of view on whether a deal is going to get killed. This is the toughest spot to be in emotionally, when you first realize you cannot push this through the investing process. And soon after, you finally pass. You may or may not have shed a tear… It really does feel bad.
Key insight #8: Show them the respect they deserve.
This is not just specific to this stage of the process. A number of VC blogs and podcasts talk about the art of the pass email – genuine and honest, with clear feedback on what kept you on the sidelines -- but the respect should come from the first email interaction. You can do this by working hard/moving quickly, by maintaining transparency at all times, and by being helpful (yes, sometimes we are helpful… :P) by doing some of the things we’d do after investing even before we invest e.g. customer introductions, hiring referrals, etc.
Bonus – not much of an insight: it takes time.
I am just 6 months in. I’m aiming to be better with time, but I am also hoping other junior investors like me can leapfrog some of these lessons I have learned and be more cognizant of managing their emotions when the going gets tough. If you want to chat about any of this, feel free to contact me.
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