In the world of high-tech in general, and Israeli high tech particularly, venture capital is the main avenue for funding new technology companies. This remains a fact even today when startup costs are lower than they’ve ever been and where angel investors can provide alternatives to a lot of deals. However, despite the prevalence of VCs in the startup world, I find that there are a lot of misconceptions about the field. A lot of entrepreneurs don’t quite understand who the VCs are and how we operate.
Although the subject has been covered before in many places, I think it’s worth reiterating with a multi-entry series about how VC works.
Let’s start with what VCs are and what we aren’t.
Quite often, I hear complaints along the lines of, “You VCs say you like risk, but you’re really only looking for the next Google and other sure things.”
Contrary to popular opinion, we are not wild-eyed gamblers nor do we particularly “like” risk. I think part of the confusion here is local and comes from poor translation. In Hebrew, the term “venture capital” is hon sikun, which literally means “risk capital”. (A more accurate translation into Hebrew would be something like hon yozma.) In other words, we are in it for the venture, not the risk.
Venture capitalists are first and foremost financial investors who specialize in investing in technology companies. All startups carry some degree or another of risk. The earlier you invest in a company, the greater the risk. The risk is just part of the business.
It’s also inaccurate to say that we are looking for “sure bets”. While it would be terribly nice to invest in the next Google, who can tell what the next Google is. (As the old cliché goes, back in 1997 who would have thought that the world needed another search engine?)
Another big misconception: although we are seen as haughty, we are not the masters of our own destinies. To paraphrase an old Bob Dylan song, we have to serve somebody. And that somebody is our investors. The majority of money in VC funds comes from large institutional investors such as pension funds which manage tens and sometimes hundreds of billions of dollars. These investors earmark a certain part of the money to high risk/reward vehicles like venture capital. In return we try to provide a high rate of return.
What does this all mean?
First, this setup dictates our business model and what types of opportunities we tend to invest in. More about this in the next part of this series.
Secondly, it means that every few years VCs have to go hat in hand to our investors and try to raise a new fund. Yes, we do know what it feels like to be the ones asking for money. We also have to sit through endless series of meetings, go through a rigorous due diligence process, and then wait around impatiently for an answer. This probably won’t win us any sympathy points with the entrepreneur community, but it’s worth mentioning anyway.
So, that’s us. Next time: the VC model and how it affects our decision-making.