Venture capital (VC) firms are a vital funding source for new businesses and a major driving force behind innovation. In exchange for evaluating a fledgling company’s growth potential and providing funds and mentoring to help it develop, venture capitalists gain an ownership stake – or equity – in the business. Often, they’ll aim to cash out of the investment once the startup reaches a size and credibility that will allow it to be taken public or sold to a major corporation.
Household names such as Google, Facebook, Uber, Gojek and Lazada are celebrated examples of ‘unicorns’ – VC–backed companies that reach a value of over US$1 billion. However, working with early-stage companies is also a risky roller coaster ride.
So how best can venture capitalists avoid the pitfalls, and what does it take to run a successful VC firm?
We asked three INSEAD alumni – all professional investors in very early-stage companies – for their top tips, and how gaining an INSEAD MBA has helped.
Hone your business acumen
Along with providing financial support to the startups in their portfolio, venture capitalists need to nurture them. That means analysing business plans, negotiating and managing investments, and acting as hands-on strategy coach, consultant and mentor, among many other things. “You need a deep understanding of all the mechanisms underpinning the development of a successful firm,” says Sergio Massano, MBA Class of 2016 and Head of Expansion and Partner at VC firm Antler.
Massano spent years working in senior roles in the technology sector before he signed up for an MBA at INSEAD. “I wanted to make a shift and join the VC industry. I’d accumulated a lot of operational experience, so in an intuitive and empirical way I understood what makes successful businesses tick. But I realised that to succeed in the demanding VC environment, I’d also need a rock-solid theoretical framework. Ultimately, the deep dive into the intricacies of finance, management, accounting and strategy that I got from the MBA played a big part in giving me the confidence to become a fund manager,” he says.
Harness a multicultural approach
The lifeblood of any VC firm are its limited partners (LPs). Typically, these are large institutional investors willing to supply the firm with capital to manage in a long-term commitment. For Khanh Tran, MBA Class of 2014 and Managing Partner at Vietnam-focused VC fund Touchstone Partners, INSEAD’s emphasis on gaining a global business perspective has helped him build an investment pipeline of high-quality LPs.
“A big part of our job is to break down business and cultural barriers that may exist between our LPs and the local startups that we invest in here in Vietnam, who may not yet have had any international exposure,” he says.
“To succeed, you need to be local yet international enough to speak the languages of both worlds."
"That’s something which INSEAD trains people to do very well. During my MBA, I sat in classrooms with over 90 nationalities and thanks to that, communicating with and listening to people from many other countries and cultural backgrounds has become a norm. This approach has helped tremendously as we work to build our LP base and attract top-tier firms.”
Define a unique differentiation for your firm
As the VC market grows and becomes increasingly competitive, startups can be more selective about the portfolios they wish to join. Ensuring that their VC firm has a unique angle or point of differentiation is one way venture capitalists can increase brand awareness and build credibility with the most promising founders.
Having been a successful founder and operator, Tu Ngo, MBA Class of 2014 and General Partner at Touchstone Partners shares, “The INSEAD MBA’s relevant and up-to-date curriculum meant we had multiple chances to gain familiarity with disruptive business models and get up-to-date with emerging industry trends. More importantly, INSEAD’s emphasis on using business as a Force for Good really resonated with me.”
“That helped us shape a clear investment thesis when we set up Touchstone. Our broad focus, for example, is on providing seed and series A funding to technology-enabled businesses and helping them grow sustainably over the next five to ten years. But we’re particularly excited about funding teams that besides building scalable solutions, also value integrity, teamwork and transparency. Ultimately, we want to attract and be known for investing in a new generation of business leaders in Vietnam that can fix real pain points across different industries and improve the quality of life for our community.”
Build a great network
A global network can be a vital tool for venture capitalists as they seek to raise funds and build business opportunities for startups in their portfolio. Leveraging international industry connections is also an important way they can help their portfolio companies hire top talent as they scale, from engineers to designers to sales and marketing people and more. “Very few VC firms can remain local and still be extremely successful. Winning in this environment requires a global mindset and a global network,” says Massano.
The INSEAD alumni network has proved a valuable resource for him. “It’s highly diverse – there were 74 nationalities among the 500-plus people in my INSEAD MBA intake alone, for example. If I need to find out something about the Brazilian market, say, there are twenty classmates that could help me instantly, just within my alumni WhatsApp group.”
For Touchstone Partners, INSEAD alumni were key drivers in their fundraising process. “Fundraising requires a deep understanding of who-is-who within the bigger organisations so as to better navigate through the approval process at these big firms, shares Khanh. “Our INSEAD alumni working at these companies helped us fast track this learning curve and gave candid feedback on what can and can’t be done, saving us time and efforts in getting things done. Some INSEAD alums went even further to introduce us to their close contacts to help us both on fundraising as well as other critical governance for the fund.”
Take the long view
When VC firms invest, they generally intend to nurture a company within their portfolios for at least five years, effectively tying up their money for a lengthy period – in some cases, for up to 10 years.
“For many people, the potential for big payoffs is the main driver making the VC career path desirable. But in fact, success isn’t a guarantee and one needs to make peace with the fact that multiple factors influence an investments ability to become a breakout success. Before an exit, a VC will spend years side-by-side with portfolio companies, through the bumpy road, fast-growing businesses face,” says Massano.
For those who are looking into VC as career, Massano offers some advice:
“The trick is to make it your passion."
"Every day, I get a glimpse of the future, sometimes still taking shape in the entrepreneurs’ minds. My role is to help these brilliant people fulfil their vision, growing while developing new solutions to old problems. The investment is only the beginning of the collaborative relationship with portfolio companies. Venture Captial is a key part of an ecosystem changing the way we work, the way we travel, the way we think and live. And that never stops being genuinely exciting.”