Venture Capital Strategy: How to Think Like a Venture Capitalist
VCs are paid a fee plus a share in the profits for managing these funds, and they have a legal obligation (a fiduciary duty) to act in the best interest of these institutions, who are the limited partners (LPs) of the VC fund. Figure: VC firm ecosystem, from LPs to GPs to startups
Patrick Vernon • Venture Capital Strategy: How to Think Like a Venture Capitalist
ONE bird in the hand is worth TWO in the bush
Patrick Vernon • Venture Capital Strategy: How to Think Like a Venture Capitalist
The Holy Grail for validation is the existence of paying customers. There is simply no better way to prove that a startup creates value than to have customers paying for the solution. However, the existence of customers is not enough information for VCs to create a narrative around growth. We need to know everything about how customers perceive our
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scale. Is the improvement enough to compel customers to change behavior? This leads us to a third step in defining a value proposition: after identifying customer pain points being addressed by our better/faster/cheaper solution, we need to quantify the value that we are creating.
Patrick Vernon • Venture Capital Strategy: How to Think Like a Venture Capitalist
The higher the valuation, the less the dilution. So founders should only raise enough (with some cushion) to hit some milestones.
Patrick Vernon • Venture Capital Strategy: How to Think Like a Venture Capitalist
The revenue model only includes how a company transacts with customers, i.e., how it makes money. The business model includes much more, like building infrastructure and developing strategic partnerships.
Patrick Vernon • Venture Capital Strategy: How to Think Like a Venture Capitalist
In other words, we can use the competition’s customer adoption success as an indicator of our startup’s potential acceptance in the marketplace.
Patrick Vernon • Venture Capital Strategy: How to Think Like a Venture Capitalist
Question #1, from the market perspective: does the project create value? Is someone going to benefit from the endeavor? Question #2, from the industry perspective: is the project sustainable? After we create some value, will we be able to build an organization to continue creating value?
Patrick Vernon • Venture Capital Strategy: How to Think Like a Venture Capitalist
This can be a challenging aspect of the job for young VCs: pushing back on the founders’ ideas about which customer segments to target. A surprising number of early stage startups are not sure (yet) which market they should go after. In fact, this can be the source of great conflict. Agreeing on which markets to pursue can be an important part of t
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