Successful VC firms and REI
Yesterday I was watching a You Tube video on EO (Entrepreneur’s Organization) channel by Ilya Strebulaev, a professor in Stanford that teaches VC investing. A few things things that stood out to me in that video:
Successful VCs have a fast-lane startup analysis model that they use to quickly decide on whether they want to spend an additional 30 minutes on the startup or not. This allows them to go through a lot of start ups quickly and say no to a lot. This mode is also where they are thinking about “why will I not invest in this company” and are just looking at the startup from an elimination perspective. In RE investing too this is critical. I personally use something similar. See my post Flip Deal Analysis in Phases for the methodology I use.
Successful VCs structure their companies for fast action. All parts of the company are built for Bias for Action and Delivering Results. Ilya spoke of an example where Sequioa Capital noticed that WhatsApp app was blowing up on all app stores. The only information they could find about the company was that it was based on Mountain View, CA. While they couldn’t find any other information, their associates set out on foot knocking every door in Mountain View to find the founders, and convinced them to take an investment from them. Later when WhatsApp was bought by Meta for $18B, the bias for action shown by Sequoia and their drive to deliver results has netted a handsome return to their LPs. Lesson, always bias for action, build teams that deliver.
Successful VC investing is not a gamble, like most people think, where you invest in 20 and bag one 100X-er. VC firms are structured for success. They have the right teams they put together, they have internal algorithms and mechanisms in place to analyze startups and for going after the ones they qualify, and most importantly they have processes and mechanisms that set up their entrepreneurs for success. They continuously monitor progress and help every startup course correct as needed. Lesson for a RE investor - focus on the mechanisms of success, put the right team in place - you cant do everything because you are not an expert at everything, have the right course correction mechanisms to make a deal successful.
Successful VCs embrace failure. They have more deals that fail than succeed. Budapest hosts a “Museum of Failure” which is a collection of failed products and services from around the world. Innovation needs failure. To be able to comfortable with failure, VCs make sure they contain their investment in any company to a small portion of their overall capital. (Yeah right.. A $20M investment is a small investment , but you are also talking a $40B VC firm) In REI we dont make the the same type of 100x returns in 10 years that VCs can make. So our failures need to be managed and controlled. However not every deal you take on will give you to 30% to 50% annualized ROI. You win some, you lose some. Just dont give up.. keep marching. So easy to that, but while starting where you need to put in $200k to $500k of your money saying we will be comfortable with failure is not easy, especially when we are not sitting on $5M on investable capital. Instead focus on how to increase your chance of success - underwrite conservatively, add buffers to your projects, buy at deep discounts even if it means you need to wait a bit, partner with folks with expertise or pay for expert opinions, mostly know what you are good at what you are not (will do a separate blog post on this).
Successful VCs invest in the team as much as they invest in a product. As a RE investor, you will be on the other side looking for investments. Think about why ‘YOU’. Build your resume, through experience. Have a pitch ready. One paragraph on “why this is the right startup or deal. Whos your customer, their pain point, and why your product will solve it, how will your target customer find your product and why will they buy it, the financials, the business plan”. Another paragraph on “why you”. As an RE investor, I would flip the order - talk about what you have done in the past, the team you have built, the deals you have taken down, the lessons you have learnt but most importantly why you are positioned to be successful at the next deal.
