In business, as is in life, there is always risk. Our perceptions and responses to risk, both as individuals and as corporations, are determined by our choice of mindset. In most corporate settings, we are taught a mindset to mitigate and avoid all but the most moderate risk when investments are on the line. Some risks, however, are worth taking. That’s where the venture capitalist (VC) mindset comes in.
If you are a VC or want to become one, it is important to be able to recognize risk and see not only the potential negative fallout but the rare gems risk often obscures. Only by peering through that fog of risk can you be the one to identify the next “Tesla” and accelerate a new disruptive idea that paves the way for a better tomorrow.
To adopt this VC mindset, you need to be able to assess new opportunities and decide whether the potential payoff is worth the risk. This can be a difficult calculation, but it’s important to remember that not every investment will pan out. To start you on your way, here are three key tips to set you on the right path.
Let Go Of Corporate Habits
First and foremost, forget everything you thought you knew about return on investment (ROI) and risk acceptance in the first place. In a corporate setting, you were taught and expected to take the path of least resistance to most profit with minimal risk. This is quite reasonable for an established company. Its mindset is, and almost must be, that of a marathon runner and not a sprinter as it is far more important to sustain respectable growth in the long run instead of making high-risk investments that could sink the organization. In the VC space, your mindset must be to accept high risk in return for exceptional return. This is often referred to as a “Power Law” mindset.
The Power Law states that for many events, approximately 80% of the effects come from 20% of the causes. What this means for a VC is that more than 80% of your investments are likely to fail, however, 20% (or fewer) could succeed. The difference between success and failure is in making sure that the less than 20% that do succeed are exceptional enough to return the entire fund. How, you might ask?
Be Diligent, Find Passion And Add Value
Easier written than done, the secret to successful operation under a Power Law mentality is to make sure every investment has the potential to be exceptional when it can weather the risk-fueled adversity that plagues every startup. Making this determination comes down to diligence, passion and value.
The ability to see the future notwithstanding, diligence is always a good idea before any investment. With a strong knowledge of the market, focus area and a startup’s finances, it can become quickly apparent if there is potential for meaningful return. Remember, the key here is not to focus on if there is risk but if the investments can be exceptional despite the risk.
Another strong indicator is passion. If the entrepreneurial team has a clear vision and the passion to make it a reality then, in many cases, risks are merely an obstacle and success is less a matter of luck and more a matter of time. A difficult thing to quantify, the passion you’re looking for is something you’ll know when you see it.
Lastly, value is an action item to you as the VC. Can you add value? Beyond just financial backing, VCs should also provide a strategic and operational experience that can help a startup in ways that aren’t always readily apparent. No one can play this game alone, and your role in accelerating a startup and its products to market may be the X factor that results in exceptional returns.
Speaking of alone, just like the startups in your portfolio, being a VC is a team sport, and who you surround yourself with and rely on can spell victory or defeat.
Build A Team You Can Trust
You cannot and should not be a VC in isolation — you won’t be very successful if you try to. Now that you have successfully adopted your new risk maneuvering, exceptional ROI-finding VC mentality, it is equally important for you to establish a team and with them an organizational culture that is equally adaptable and ready to embrace new ideas and technologies as they emerge.
Be open-minded, take your time and be intentional about who you bring aboard. Every organization is different, but what you DON’T want is an echo chamber. Use the same selection criteria for your team as for your portfolio companies, i.e., be diligent and find that passion. Seek those with different opinions and expertise. Diversity of thought breeds excellence, and they may have insights you don’t, insights which you’ll very much need. Don’t be the smartest person in the room.
When it comes down to it, once your team is assembled, you should be able to trust it completely and be able to heed your team members’ advice, even in times in which your opinion is the minority.
Welcome To The Risky Business
Now, you’ve let go of your “bad” corporate habits, you’ve refined your keen eyes when looking for the next disruptive business and you’ve assembled your team. Congratulations, you are well on your way to becoming a successful VC! However, this is just the beginning of your journey. You’re entering a world where risks abound, and if you do it right, you’ll never stop learning. Grab your team and choose your winners, and accelerate to make your shared visions for success bring about a better tomorrow.