Values-Driven VC: Are You the Next Generation?

The Rise of the Individual Investor and the Venture Capital Landscape

An increasing number of people are now taking on the role of investor. In 2020, nearly 20% of all U.S. equity trades were executed by individual, non-professional investors – a significant increase from approximately 15% the year before.

Driven by the potential for substantial gains, a growing number of individuals are considering establishing their own investment businesses.

Democratization of Fundraising and the Need for New VCs

The fundraising environment is becoming increasingly democratic and accessible. It is therefore crucial to guide individuals toward the appropriate steps for establishing a venture capital firm.

Equally important is ensuring that qualified individuals enter the VC ecosystem. The startup world is evolving rapidly, and new investment managers must demonstrate adaptability to this changing environment.

Modern VCs are required to offer more than just capital to attract top-tier companies. A strong emphasis on impact investing is also essential for securing commitments from prominent institutional investors.

The Importance of Values-Driven Investment

Startup investors represent a critical financial resource for widespread innovation. At Founder Institute, we recognize the necessity for a greater number of VCs who prioritize strong ethical principles.

This is because these values-driven investors will be instrumental in supporting the companies that will shape a more positive future for humankind. Our inaugural “accelerator for ethical VCs” program experienced significant demand, demonstrating this shared belief.

Key Questions for Aspiring Venture Capital Fund Managers

For those contemplating launching their own VC fund, several fundamental questions must be addressed. These considerations will help prospective investors chart a successful course.

• What is your investment thesis?
• How will you source deals?
• What value can you add beyond capital?

Successfully navigating these questions is paramount for aspiring investors in 2021 and beyond.

Considering Your Motivations for Startup Investment

The decision to invest in startups extends beyond purely financial considerations. Venture capitalists wield significant influence in shaping the future, possessing the capacity to foster positive change or inadvertently cause detriment as they identify emerging industry leaders.

A sole focus on monetary gain is unlikely to yield substantial success. Recognizing truly exceptional businesses necessitates a perspective that transcends financial metrics, evaluating the enduring quality of their vision, their tangible societal impact, and the degree to which consumers will embrace or reject their offerings.

The vast majority of startup founders dedicate considerable effort and personal investment to their ventures, driven not solely by profit but also by a desire to effect positive change and create products consistent with their core values.

Consequently, any venture capitalist aiming to attract top-tier founders must align the vision and mission of their fund with these same principles.

The Growing Importance of ESG in Venture Capital

While historically slow to adopt environmental, social, and governance (ESG) principles, the venture capital landscape is demonstrating increasing signs of evolution.

A growing number of firms are actively collaborating to integrate ESG practices, recognizing that doing so not only benefits society but also enhances their overall business objectives.

To further encourage this shift, participants in our VC Lab were invited to undertake The Mensarius Oath – a professional code of ethics, derived from the Latin term for “banker” or “financier”.

This oath is designed for finance professionals committed to building a world that is both ethically sound, economically thriving, and environmentally healthy.

• The Mensarius Oath promotes ethical conduct.
• It emphasizes the creation of prosperity.
• It prioritizes a healthy planet.

Demonstrating Your Worth as a Venture Capitalist

The venture capital landscape is evolving, with a growing number of firms and increasing concentration of power. Consequently, merely providing substantial financial investment is no longer sufficient to attract top-tier startups. Founders are prioritizing value over sheer capital; they seek alignment with their mission, valuable connections, supplementary services, and specialized industry knowledge.

It’s crucial to recognize that highly sought-after founders have the luxury of selecting their venture capital partners. To demonstrate your suitability, a demonstrable history of success within the relevant sector – or readily applicable experience from a different field – is essential. Credible referrals also play a significant role.

A compelling value proposition or a clearly defined niche is also vital for differentiation. Consider, for instance, Untapped Capital’s focus on founders who are often overlooked, or R42 Group’s specialization in artificial intelligence and longevity ventures.

Defining Your Unique Contribution

If you assess your current profile and determine that you aren't yet positioned to deliver substantial value to founders, dedicating time to self-assessment is beneficial. Specifically, articulate your objectives as a fund manager.

Clearly define your vision for the companies within your portfolio. Furthermore, pinpoint precisely how your unique skills and expertise can facilitate their success.

Key Attributes Founders Seek

• Mission Alignment: Shared values and a common understanding of the company’s goals.
• Strategic Connections: Access to a valuable network of industry contacts.
• Value-Added Services: Support beyond financial investment, such as mentorship or operational assistance.
• Industry Expertise: Deep understanding of the market and competitive landscape.

Founders are increasingly discerning, and a strong track record coupled with a clear articulation of value are paramount to securing investment opportunities.

Establishing Credibility as a New Venture Capital Fund

New venture capital (VC) funds often encounter initial hesitation from potential limited partners (LPs) due to a lack of established performance history. Therefore, cultivating a strong brand narrative is crucial for demonstrating value and building trust.

Begin by identifying your core competencies. What specifically sets your fund apart? Consider framing your strengths using statements like, “My ability to secure favorable terms stems from X,” or, “I facilitate growth within my portfolio companies through X.”

Avoid emphasizing capital reserves as a primary strength at this early stage. Instead, concentrate on factors that establish your distinctiveness, trustworthiness, and relevance within the investment landscape.

Key differentiators might include a robust network of strategic connections, deep sector-specific knowledge, or a proven track record of successful exits. A well-defined “investment thesis” can further solidify your fund’s positioning; resources are available to assist in this process.

Refining Your Core Strengths

After compiling a list of potential strengths, prioritize the top three. For each strength, articulate how your network and expertise will amplify its impact.

Gather feedback on these statements from a representative group – peers, mentors, or entrepreneurs – to determine which resonates most effectively. A clear consensus will indicate the central pillar of your VC fund’s investment strategy.

This process of self-assessment and external validation is vital for crafting a compelling narrative that attracts LPs and establishes your fund’s credibility in a competitive market.

The Significance of a Robust Network

The connections you cultivate are often as crucial as your expertise, particularly for prominent venture capitalists who operate at the center of information and talent pipelines. A strong network signals to founders that you are well-regarded and provides assurance they will gain access to valuable connections, including mentors, potential customers, investors, and future employees.

Establishing yourself as a thought leader, being an alumnus of a recognized organization such as Uber or PayPal, or fostering a community focused on a developing industry can significantly enhance your deal flow. However, this standing and these relationships must be built prior to launching your fund; attempting to build a network from scratch can be overwhelming and lack the necessary credibility.

Mapping Your Network

Avoid solely relying on intuition to assess the strength of your network. Instead, systematically chart your existing relationships, categorizing individuals based on their level of connection (close contacts versus acquaintances) and relevant attributes (e.g., consumers, finance professionals, former CEOs).

This “map” can be a simple spreadsheet with columns for each category, or you can utilize visually appealing tools like Canva – which is also useful for sharing with your team and identifying areas where network expansion is needed.

Determining the Optimal Fund Size for Launch

Launching a venture capital (VC) fund shares similarities with establishing any business venture. A clear vision, a capable team, legal formation, capital acquisition, value delivery, and stakeholder reporting are all essential components.

Initially, a crucial decision involves defining the desired fund size and subsequently obtaining substantial commitments from Limited Partners (LPs). These commitments should represent a minimum of 10% of the fund’s total capital.

LPs encompass a diverse range of entities, including corporations, successful entrepreneurs, governmental bodies, and even other investment funds.

LP Investment Expectations

Typically, LPs will expect the General Partner to make a personal investment of at least 1% of the total fund size. This demonstrates a strong alignment of interests and is often referred to as having “skin in the game.”

Given this expectation, a prudent approach is to begin with a smaller fund, ideally within the range of $5 million to $20 million.

This initial fund serves as a valuable learning experience, allowing you to showcase investment returns and establish a foundation for securing larger capital commitments in subsequent fundraising rounds.

Supporting Founders Throughout the Entire Startup Journey

Establishing a successful partnership with startups necessitates a long-term commitment. Simply providing value at the time of investment is insufficient; founders require ongoing assistance throughout the complete startup lifecycle.

It’s crucial to avoid overpromising and subsequently failing to meet expectations. Consider the types of startups you are most interested in collaborating with. What assistance can you offer them currently, and how might your support evolve as they grow?

Furthermore, contemplate how you can contribute to a successful exit strategy for these companies.

Approaches to Providing Support

One effective method is a skills-based approach. This involves allocating specific resources and connections related to areas like marketing, hiring, fundraising, and culture creation, deploying them as the startup progresses.

Alternatively, you could implement a sprint-like planning system. This entails regular check-ins with founders to assess their progress and adjust your support accordingly.

Regardless of the chosen structure, maintaining realistic expectations regarding your capabilities, availability, level of involvement, and documentation practices is paramount.

The Evolving Landscape of Venture Capital

The future of venture capital will be shaped by investors who prioritize strong values and build funds specifically designed to address the evolving needs of founders.

While traditionally perceived as exclusive and opaque, 2021 may mark a turning point, fostering a more transparent and equitable environment for both businesses and investors.

This shift towards openness and fairness promises to redefine the dynamics within the VC ecosystem.

• Key areas of support include marketing expertise.
• Access to a strong hiring network is vital.
• Assistance with fundraising efforts is often crucial.
• Guidance on building a positive company culture is essential.

By focusing on these core elements, investors can provide substantial and lasting value to the startups they support.