Without the work of venture capitalists, some of the world’s most popular companies may never have succeeded. Providing major funding to startups or and small businesses with serious growth potential, a venture capitalist must rely on a little bit of intuition, a lot of grit, and a hint of luck when he or she is choosing which companies to invest in.
When a VC’s investment doesn’t pay off, the general public will likely never hear about it. On the other hand, some of the best-known decisions from VCs have led to the rise of such popular companies as Google, Twitter, Facebook, Spotify, and Dropbox.
With VCs playing such a critical role in the startup sector, there are naturally stereotypes about what kind of people they are, how they interact with entrepreneurs, and the work that they do. Many of these aren’t true, and some are flat-out unhelpful.
To help people better understand venture capitalists, listed below are three common misconceptions and two actual facts about these professionals and their careers.
Misconception 1: Venture capitalists seek out startups in their earliest stages.
While venture capitalists do invest in companies before they become widely known or popular, they tend to invest in companies that are at a point in development where they want to commercialize their product or service. VCs are not often the early investors in a company because they make investments with the goal of profit over many years.
Conversely, early sources of seed funding tend to come from friends and family, who have a personal and emotional investment in an entrepreneur’s success, or from angel investors, who may not have a personal or emotional investment in the founder but do have a personal or emotional interest in a specific industry. Because of this, angel investors tend to be willing to take a bigger risk on early stage companies that have yet to demonstrate the viability of an idea, whereas VCs like to see some evidence that a startup is a good investment.
Misconception 2: If a VC offers to support your startup, it’s always a mistake to turn them down.
VCs have a lot to offer financially and, in the best cases, in an advising capacity. However, that doesn’t mean that accepting venture capital funding is the best decision for every startup or in any situation.
As mentioned above, it’s a VC’s job to make money through successful, long-term investments in promising companies. To consider their investments a success, VCs need to see the startups that they invest in grow and increase profits by certain increments over time.
Businesses that can’t meet those financial goals care considered a loss, in many cases. Expert VCs recommend that founders always determine whether or not their definition of “success” for the company is in line with what a VC considers to be the metric success before agreeing to accept venture capital funding.
Misconception 3: VCs are generally unscrupulous and out to take over your company.
It’s easy to generalize when talking about a whole group of people, especially when they are in a position of financial power. But startup founders should not buy into the common misconception that VCs are ruthless and out to seize control of a startup that an entrepreneur has dedicated years of time and energy into building.
Beyond the fact that many VCs are passionate people with morals, the fact is that it’s not in the best interest of VCs to try and take majority ownership in a company or to abruptly fire leaders within the startup. Taking ownership away from a successful startup can be demotivating to founders and cause the company not to reach its full potential.
Similarly, suddenly firing longtime leaders within the firm does not reflect well on a VC’s reputation. The funding world is a close-knit industry. In order to be truly successful in venture capital, a VC needs to have companies seek him or her out for potential investments. Developing a reputation as a greedy and ruthless investor will not bring quality potential investments to his or her office.
Truth 1: The people who become VCs come from many different personal, educational, and professional backgrounds.
Venture capitalism is often thought of as a profession for the wealthy and those born into privilege. While a number of VCs do attend prestigious business schools or begin their careers in investment banking, there is no “typical” VC or set path that a person can follow to break into the industry. In truth, you don’t even need a sizable bank account to get started in the venture capital world.
You don’t have to be born into a privileged class to become a venture capitalist. Oprah Winfrey grew up in a working-class family, and today she is a billionaire entrepreneur and investor across multiple industries. Mark Cuban comes from a similar social background.
The areas that VCs invest in and the qualities that they bring to their partnerships are wide and varied. No two venture capitalists have the same approach to business or the same story about how they got where they are. Ultimately, the only thing that all venture capitalists generally have in common in is grit—a combination of passion, perseverance, and commitment to putting in hard work in spite of not seeing results for long periods of time.
Truth 2: Most VCs invest in founders as much as they do in products.
To be clear, an entrepreneur is never going to attract the interest of a venture capitalist without an impressive product. In order for a VC to consider investing in a startup, he or she is going to be looking for a product that is already great—not a mediocre product that could possibly improve with some investment.
Talented VCs are looking for companies with products to take from great to amazing. Companies that don’t meet that bare minimum will have a difficult time attracting venture capital funding.
However, if a product is great, it’s important that entrepreneurs recognize VC investment isn’t given just because of the product a company is selling. For most venture capitalists, the person leading the startup is just as important as the product.
VCs will look for competitive, obsessive, gritty entrepreneurs who apply a do-whatever-it-takes mindset to the growth of their company. The best venture capitalists are those who have more to offer a startup than just funding, and look specifically for talented, committed entrepreneurs to mentor.