How can you balance patience and returns as a venture capitalist?

As we step into 2024, VCs are increasingly exploring alternative return structures for a balanced investment approach. ESG principles are influencing decisions, emphasizing sustainability and responsible investing. The growing trend of venture debt reflects a move towards providing customized risk and return profiles, along with increased liquidity.

In venture capital, balancing patience with returns is like playing chess with a clock. You need strategic foresight and a knack for timing. It's about knowing when to hold 'em and when to fold 'em. Invest in teams with long-term visions, but keep an eye on market trends for exit opportunities. Remember, unicorns don't grow overnight, but you also don't want to back a horse that's never going to leave the stable. Patience is key, but so is recognizing when it's time to cash in your chips.

There is a big difference here between a fund and a BA. The questions seem better suited to a BA, as a fund must have the answers decided upon before even raising funds. It is highly unlikely that any investor would trust in a fund that didn't have an objective for their returns, the level of risk (i.e. stage more often than not) or their investment horizon. These are the factors that they use to decide whether to invest or not; if the risk/reward ratio makes sense for them, and the timeframe for returns, and as such the projected IRR. As a BA however, you must also answer these questions before investing your capital, and I'd add a few more, such as what are you more focused on: financial return, giving back, learning, or enjoying yourself

As a venture capitalist, balancing patience with returns involves a strategic approach to investment. Start by diversifying your portfolio across different stages and sectors to mitigate risks. Conduct thorough due diligence to understand the potential and pitfalls of each venture. Set realistic expectations for returns, acknowledging the long-term nature of venture investments. Develop clear exit strategies for each investment, but be flexible to adapt to market changes or unexpected opportunities. Engage actively with your portfolio companies, offering support and guidance to accelerate their growth. Stay abreast of market trends and be patient, as high returns often come from companies that take longer to mature and the key is time.

As an impact investor, layering your impact thesis strengthens the compass that is the investment thesis. From there, as we step into 2024 I'm seeing more funds (ours included) considering alternative return structures to support striking the right balance.

It's also a good idea to diversify across different time - to ensure that you are not penalized by macros in case the time turns out to be wrong as determined later. At the same time, too much diversification leads to sub-optimal returns.

Diversifying the portfolio is one of the tenets of the so-called asset allocation paradigm of mutual funds, endowment investments and wealth management. In the venture capital business, diversification is tough, not necessarily plausible in the purest sense as the fund entity financed by LPs have an investment thesis that may limit diversification based on geographical, sectoral and duration. The room for maneuver is strictly defined by the fund's investment thesis and the size of the fund. Lumping in early and late stage in investments is very unlikely. So what do we do? Think very carefully about the fund's thesis and its limitations before you go out to LPs for money. Be realistic on expectations of performance. Eat the humble pie early!

I bet on AI. I Bet on SaaS. I Bet on real-estate. One egg, one basket. Sensible and stable. Doing this since 2007-8.

If a VC manager diversifies more across industries, the fund will carry less industry- specific risk, thus enabling the manager to engage in riskier portfolio companies. Also diversifying the founder profile is important: Research from the Kauffman Fellows Research Center shows that while only 20% of capital is invested in ethnically diverse founding teams, those teams achieve 30% higher returns than all-white teams.

Diversification in a limited number of industries enhances VC portfolio returns. This is featured in my recent scientific research work.

There are two distinct venture strategies: 1) Make an investment and move on - if the founders succeed you were right and if they don't you chose poorly. There is nothing you can do beyond the initial investment to change the outcome. 2) Make an investment and then roll up your sleeves and help them build - this includes helping with recruiting, customer introduction, product strategy, fundraising and more. The big belief here is the value and experience you bring can change the end outcome of the startup. Both for founders and investors, it's important to pick which camp you fall under. I strongly fall in the second camp and do believe in helping founders post investment.

Supporting founders is super important as VC, Since most of the time VC have unfair advantage view on how everything looks like in the market right now from birds eye perspective, since founder are mostly on the ground and hyper focused. I believe this point is what truly matters in terms of increasing your chance on getting ROI that you wanted.

Supporting founders is a key part of the equation and should always be considered as an integral part of the venture capitalist role, especially if they have a long experience. Founders will lose patience, feel lonely, react emotionally, worry about their many stakeholders, work too hard, get lost in the constant daily flow of decisions that need to be made or problems that need to be solved. They are usually incredibly resilient, strong, driven but they are humans and can at times need a sparring partner, a helping hand, a sound advice, or just someone they can vent to. They experience the classic ‘lonely at the top’ feeling but on steroids as they usually had to fight hard to get their business off the ground. So support them !!!

As an investor your success is inextricably tied to the success of your founders. Make every effort possible to support your founders, no matter the time or cost and your efforts will be repaid with higher ROI.

In my opinion, it really depends on the startups. Some startup founders really know what they are doing and how to leverage your resources. They reach out when necessary, and it’s these leaders who stand a good chance at success. Other founders, especially early-stage founders, may need more hands-on help. However, the goal should be to help them take off, not to rely on you all the time.

I am afraid most vc's are just unicorn chasers to show their lps returns and get their carry. Have met very few who have patience. If they do have patience then they found lps and gps to back them. It must be known from the beginning that the VC care about their founders and their LPS must have patience, that the VC will take a farming approach and not a hunting approach. Choose your LPS and GPS wisely. It never goes according to business plan. It is always worse or better. If better, any VC is fine. If worse, then having a patient VC who is willing to get their hands dirty to fix the problem is critical.

With limited financial resources, portfolio companies need operating plans with clear triggers for continued support by the board. The operating plan assumes a certain level of cash to last through the year--missing revenue milestones means shortening runway. Hiring plans and spending need to be contingent on hitting the milestones, and if revenue milestones are missed, the spending must be adjusted as much as possible to offset the burn. By building milestones into the operating plan, VCs can demonstrate support and patience with the team, giving them the benefit of the doubt in approving a plan while agreeing up front on the triggers, consequences, and remediation steps to be taken if the initially agreed upon goals aren't met.

Effective venture capitalists diligently monitor their performance to enhance investment strategies and maximize returns. Regularly assessing portfolio performance, analyzing market trends, and staying abreast of industry dynamics are crucial. This proactive approach enables VCs to identify areas for improvement, adapt to changing landscapes, and capitalize on emerging opportunities. By maintaining a vigilant eye on key performance indicators and fostering a culture of continuous improvement, venture capitalists can navigate the complexities of the investment landscape and optimize their success in the dynamic world of startup financing.

With Big Tech now contributing to 30% of the S&P value, another factor to consider could be evaluation of exit opportunities. Assessing whether a startup is an attractive acquisition target or has the potential for an initial public offering (IPO) would help VCs gauge the likelihood of realizing profits.

Monitoring the performance of small businesses poses unique challenges. Without the extensive metrics available in larger companies, we often rely on open communication from the companies themselves. Regular updates on product development and customer wins are invaluable in gauging their progress and success. It’s a partnership built on trust and transparency.

We have found that alternative return structures and hybrid models can enabling adaptability. The strength of the relationship with the founders is critical to ensure you can adapt with them to get to the desires outcomes.

We all make mistakes and the ability to assess the situation and be able to make changes to both the existing investments strategy as well as adopting and at times walk away from an investment when you understand that situation has changed.

Be connected to the investments you support and add value. True or not: I'm hearing from quite a few large family offices-- a major source of capital behind many VC funds--that the fund managers seem more interested in building their next fund rather than ensuring the companies they invest in have the attention they need. Perhaps it's just perception. Perhaps it is reality. What's clear is that something had better change or we're going to see many VCs and the startups they support go up in flames.

Finding the equilibrium between patience and returns is paramount for long-term success. Flexibility and adaptability serve as crucial pillars in navigating the ever-evolving landscape of investments. Remaining open to adjusting strategies, seizing emerging opportunities, and swiftly responding to market shifts are essential practices. By embracing flexibility, venture capitalists can effectively balance the need for patience with the pursuit of optimal returns, ultimately driving sustainable growth and value creation within their portfolios.

Flexibility and adaptability are paramount for a venture capitalist navigating the dynamic landscape of investments. In this ever-evolving market, being open to diverse opportunities, quick to pivot strategies, and adept at embracing change ensures success. Flexibility enables a VC to capitalize on emerging trends, adjust to market shifts, and forge resilient partnerships. Adapting to new technologies and industry shifts is not just a strategy; it's a necessity for thriving in the unpredictable world of venture capital.

Each investment is a lesson, shaping a nuanced approach. The key is staying curious. Every deal teaches something new. Learning from setbacks is as crucial as celebrating successes. Market trends evolve, and so must I. Continuous learning isn't just a philosophy; it's a necessity. It's about refining instincts, staying ahead of industry shifts, and bringing that wisdom to future investments.

Employ a data-driven methodology to enhance learning and draw insights more effectively from both personal and collective experiences. Notable VC firms such as Signalfire and Rebel Fund leverage data and AI extensively in their decision-making processes for investments and portfolio management. Rebel Fund specifically examines YC backed companies, analyzes the contributing factors to success of companies, and employs this data to construct a predictive model to assess the investability of startups based on available information. Signalfire goes a step further by developing an AI model for talent acquisition and obtaining valuable gtm insights. This trend suggests that VC firms are likely to adopt structures similar to tech companies.

Learning from experience in managing portfolios is key to success. How do you put in a process to learn from experience? Organize structured post-mortems to borrow the macabre term from investment bankers. Discuss what went well, what did not go well, what could have been done differently and better, how the process that led to success or failure was conducted, what the three learning outcomes are. Document your learnings for future reference. Prepare a long list of questions to ask during a deal or investment and enrich the list with your postmortem learning outcomes. Learning from experience requires discipline, a shared process and a moment to discuss all without distractions - a mindful and intentional reflection.

Tese ajuda a manter o foco; experiências (positivas ou negativas) aprimoram-na. Adapte suas escolhas com base em mudanças constantes. Retroalimentação é crucial. (A equipe de fundadores não foi o que voce pensava?); (novas tecnologias irromperam no mercado?)

I have been on both sides: fundraising for Shalder and Simpol and analyzing whether it's a good opportunity for Flori Ventures. Here are my key insights: -Understand the reasons for the other side's involvement. Whether I'm a fund manager or investing my own money, consider whether I have institutional or individual LPs, what the mandate is, and whether it's my first or fifth fund. Asking these questions will provide insight into my status and strategy. Many times founders come to meetings showing their product and making requests without understanding the motivations of the investors. Every investor has their own reasons; learning to discern these motivations is critical.

One of the hardest things about venture capital is that the feedback loop, as measured by returns, is extremely long - 10 to 15 years at a minimum. This means it is important to identify both short and medium-term milestones or metrics for success that you can hold yourself to and align your LPs against. And while TVPI and DPI are natural fallback metrics along the same lines, it still takes a while to see movement there. Giving yourself short-term objectives to track your progress is essential in ensuring you stay proactive and don't get too bogged down on whether you're doing the job well or not!

Another way to balance "patience and returns" in venture capital is to attract "patient capital", especially in the context of "impact investing", which can become another strategic component of a successful venture capital approach. Incorporating an impact investing approach, which focuses on generating social or environmental impact alongside financial returns, can be advantageous. This approach generally involves patient capital, as impact ventures may take longer to show financial returns, however can generate a high perceived value in terms of their environmental and/or societal impact.

VC is patient capital with the typical fund having a a 10yr life, so there is ample time for a thesis to play out or for macro cycles to be weathered. But, let me talk about another kind of balance between holding period and returns. For those who have worked in this space, there is also this sad/funny situation wherein waiting too long at times is detrimental to returns. The trick is to sell when the exit environment is conducive even if it is early in your holding period. You can of course balance things by doing part exits, if your strategy and situation so allows. Stated differently, never be wedded to cash multiple, a short duration high IRR is a good thing also.

Patience in antithetical to the VC model. The job of GPs is to generate LPs maximum dollar returns in the shortest possible time. Generally speaking, it's a lot more difficult to effect exit timings as it's dependent on market and a myriad of other factors far into the future. VCs can however impact returns by selecting the timing of when to enter the market. We are experiencing the first venture correction in 15 years. Statistically, 2022 - 2024 fund vintages will outperform simply by benefitting from a 'rising tide' when sentiment recovers. Another way to effect returns is to use syndicates and SPVs to improve economic upside for GPs.

As a VC/Investor do the hard work. Investing is not a quick ROI. It takes a long time to succeed in venture capital, as it takes a long time for relationships to build, for companies to mature and exits to occur, for hard work to pay off. Think long-term, this industry is a small world and everyone is somehow connected! Don’t go for “hot” deals just because they are hot or just to follow the crowd. Know how you’re different from other VCs and investors, and continue to evolve and build your value-add. Know why you’re backing the entrepreneurs and companies you’re backing. Be honest, intellectually and interpersonally. Make the time to build long-term and especially meaningful relationships.