“The hackers and engineers of Y Combinator are doing what hackers and engineers do to any industry, they’re efficiently and ruthlessly disrupting the traditional model of venture capital and are going to destroy far more more wealth for their contemporaries than they create for themselves, as broadband did to entertainment, Craigslist did to newspapers, and Amazon did to traditional retailers.”—WordPress founder Matt Mullenweg
Steve Jobs is worshipped in the tech world for his ability to think like an engineer and an artist (in equal proportions.) He was as involved in hardware design and functionality as he was in user interface and consumer marketing - it was undoubtedly the combination of these two traits that made him one of the most legendary leaders and visionaries of his time. Entrepreneurs all over the world now hope to emulate this combination - hoping to mimic even 1/100th of Jobs’ success.
The equation of success in the tech world, however, is not solely dependent on the entrepreneur. The investor is the cash source - the smart money behind a trusted, repeatable and scalable business model. VC’s never write a blind check - it comes with access to network, advice and of course, ownership/skin in the game.
For years, as a student, I believed the investor’s job was much easier than the entrepreneur’s job. It was a simple yes or a no; If the VC firm liked the idea, they invested - if they didn’t - they said no. As a part of the VC world now, I have realized the process is a lot more complex. Being critical of the first few quarters of a growing business in order to foreshadow its perceived latter success is an intensely murky and difficult decision to make. It requires proportions of quantitative and qualitative expertise that are similar to those required by an exec in a rising startup. Institutional VC’s are not angel investors and they cannot afford to bet big on ideas. Sparks of disruption must exist for the firehouse of capital to emerge.
A good idea must have a business model that explores several revenue streams. VC’s are attracted to companies that explore new industries but investors are always drawn to companies that allude/vaguely utilize platforms that have been successful in the past. Precedent is king in the valley even though “venture” has an element of adventure and risk.
Proportions are also crucial to an investment decision: how much of the company will we own? Is the investment capped? What are the most effective multiples to use to measure the success of the company? The answers to these questions are incredibly important when measuring the risk of bringing on a new company into one’s VC portfolio.
The way in which the qualitative characteristics of the business intersect with the quantitative side is even more important. What is the track record of the team? Is it the right combination of personalities/skill sets? If the company is at a pre-revenue stage, can the executive team execute on the milestones laid out? When is the right time to make an investment decision (before other investors start dictating the amount and frequency of the investing rounds)?
Venture investment is as measured of a decision as it is unmeasured and vulnerable to risk. The best entrepreneurs know when to be conservative and when to take leaps of faith and the same characteristics apply to the best investors. You can’t be successful without training yourself to succeed as both an artist and as an engineer/financier.