A look into the mind of the venture capitalist investor

Published in the San Diego Union-Tribune, July 8, 2019

The dog days of summer are upon us. Instead of going to the beach and running your bare feet through the surf, wondering at the freedom of the children at play, gazing at the infinite horizon, considering all the possibilities of the world, instead let’s do something vastly less satisfying, an exercise in futility and dismay — let’s look into the mind of the venture capitalist investor.

Gigi Levy-Weiss is a managing partner at NFX, a seed stage venture firm based in San Francisco. While the classic mantra is know your customer, the same is true for know your investor and Levy-Weiss explains how the VC thinks differently than you and me.

While a deal that offers a five to six times potential return might be interesting to an angel investor, the VC politely turns up his nose. The reason is math. They can only make money for themselves (let alone the investors) if they get one to two unicorns from the fund. So they need to keep shooting three-pointers from downtown until one of them goes in. A two-point layup doesn’t count. “You only need one” is the baseline thinking for the venture fund. What’s most important is that the real money for the general partners comes from their “carried interest.” Essentially this is the bonus round (usually 20 percent) after a certain return to the limited partners. Fees are nice, but the carry is how they get the jet.

I love this guy, Levy-Weiss, because he tells the truth of how the venture investor really thinks. Unicorn, shmunicorn — the two things that determine whether you, the founder, get an investment are not what you were previously led to believe by all the mentors and advisers and incubators and consultants. Your path to investment is not centered on innovation, technology, market, business model or scale. Your path is determined by two words — FOMO and FOLS.

FOMO is Fear of Missing Out. The VC needs to be sure he gets into Uber or Google, for example. Levy-Weiss says “the big hits are so far apart that seeing one, having the option to invest in it, and missing out — that is the VC’s biggest fear.”

FOLS — this is the one I love the most — Fear of Looking Stupid. The VC has limited partners and what they don’t want at their annual meeting is the question of why they invested in Pets.com. Now, let’s be kind to the VC dilemma. Look at Theranos. That was a company that you didn’t want to miss out on. Then they went bankrupt, so you lose everything and also end up looking stupid. A double whammy!

I admire NFX for their transparency. The paradox is that for you, the founder, a $100 million exit is life changing. For the VC (unless they own 92 percent of it), it doesn’t move the needle on the fund. So this explains the critical difference between a real venture fund and the angel investor. Me, I am thrilled with a 6X, the Valley yawns.

On a separate note, I recently attended two startup demo-day events, Ad Astra and EvoNexus. The presentations and the companies were solid. It does seem that our community is alive and well. Then I was presented with a puzzle for which I do not have an easy answer.

A CEO comes into my office, does her pitch and my thinking is simple. She is a powerhouse, she has customers, she can sell and she has revenue — all the things that tilt me toward investment. The problem was that the basics — stock, financing, vesting, legal, etc., were loused up. All this could be fixed, but there would be some collateral damage. So my question to her was — with all the advisers and consultants and entrepreneurs-in-residence and service providers in this ecosystem, how is it that you didn’t get better advice? Her answer was that she didn’t know who, where or how to pick. That seemed sad to me. Maybe this is an area where the innovation community can make some improvements. It is the classic two-sided marketplace problem. Talented founder needs skilled mentor and vice versa — might be ripe for a San Diego Venture Group/CONNECT platform to solve. Sort of “Coffee Meets Bagel” for startups.