Venture capital can be a tricky, risky business to break into, particularly for newcomers. Many lessons for success are tried and true: Be smart about your business plan. Assess cofounders and partners carefully. Also consider the where of your investment—at a special lecture at GLOBIS University, legendary venture capitalist Alan Patricof said that Japan was a better place to invest than the US with an IPO expectancy.
He added that entrepreneurship is critical to transforming Japan’s society.
Most men at seventy-six are enjoying their retirement, but not Patricof. As one of the founding fathers of venture capitalism in the US, he describes himself as being “full of curiosity… [I] love to network, and I get great satisfaction out of having a role in building a successful business.”
10 Tips for the Aspiring Venture Capitalist
If there’s one person who knows the ins and outs of venture capital acquisitions, it’s Patricof. He’s been in the industry since the 1970s, when he created Patricof & Co Ventures Inc, a predecessor to Apax Partners. Today, Apax Partners one of the world’s leading private equity firms with $35 billion under management. His achievements over the past forty years are impressive. He’s helped build and foster the growth of numerous global companies, including America Online, Office Depot, Cadence Systems, Apple Computer, IntraLinks, and Audible. He was also a founder and chairman of the board of New York Magazine.
Despite this incredible track record, Patricof says he is not sure what a great venture capitalist is. But he does list ten essential characteristics that successful venture capitalists must have.
1. Be Curious
Patricof’s first tip on how to become a venture capitalist starts with a question: If you went to a dinner party and saw an unusual plate, what would you do? If you’d pick it up and turn it over to see who made it, good news.
“That is a test to see if you are a curious person,” Patricof explains. “If you are the kind of person who is curious about what’s going on and don’t take things for granted, that is an early precursor to someone who would probably make a good venture capitalist.”
2. Be Focused
When Patricof started out, venture capital was a new industry in which VCs were looking for any opportunities they could find.
“It was a new concept, the idea of sharing ownership. People couldn’t get the idea of taking in equity partners,” he recalls. “Nowadays, the industry has evolved to developing expertise and deep relationships in a particular area.”
Greycroft, a venture capital firm he established in 2006, focuses on digital media. One of its strengths is a significant mobile network.
“Entrepreneurs want investment from people who know their business,” Patricof says. “[They] do not want to have to educate.”
3. Be Disciplined
During the 1999ｰ2000 dot.com bubble, discipline went out the window. Everyone wanted to know how to get into venture capital—they didn’t all want to know how to do it right.
“VCs were backing people indiscriminately with no expertise or experience at running companies,” explains Patricof. “They were too young to start businesses.”
The VC business was over-financed, and investments went from $100 billion in 2000 down to about $14 billion in 2010. There’s a lesson to be learned from this, Patricof says: “You want to be an investor when the drums are rolling, not when the trumpets are blaring. When everybody is excited and can’t wait to get into the next deal, that’s the time to slow down and be careful. Trust your instincts. ”
Looking at Japan, Patricof feels that now is probably a great time to be an investor as long as you use appropriate discipline.
“Ten years ago, every company I looked at had an exit strategy by 2015 through an IPO. Today, the IPO market is limited in the US. You have to have a market cap of $300ｰ400 million. My sense of Japan is that you can virtually make an appointment to take a company public. You can do small cap IPOs. Don’t [worry] about what’s going on the States . . . There were probably 2,000 venture startups last year, and of them, maybe only five will go public. The rest will get sold at some kind of trade sale.”
4. Cultivate Your Network
Aspiring venture capitalists can’t wait for the good stuff to come to them. Staying active and connected is key.
“Don’t sit at your desk,” says Patricof. “Follow up on meetings. That gives you the ability to focus on areas and call on resources that you need. The best deals come through your existing network. They are made with entrepreneurs who start new businesses in areas related to what they did before and where they attract people they worked with before. As a VC, when you have an extensive network, you can help the entrepreneur build a business and deliver introductions to the advertising and media worlds.”
5. Identify Talent
One of the big questions for anyone wondering how to get into venture capital: Do you look for the right idea or the right passion?
“We invest in people first, the product second,” says Patricof firmly.
That’s not just about the companies you look to invest in. It’s also about the people who work with you, fellow VCs and staff. “Surround yourself with good people,” Patricof advises. “Use the concept of venture partners—this is someone you add to your network from outside the firm. For example, we have five full-time people, three venture partners, and an advisory group of five CEOs.”
This will mean dividing your focus a bit from pitches, but that’s a good thing, Patricof says: “A successful VC has the ability to inspire people, attract talent, and [help] the entrepreneur in recruiting talent.”
6. Understand Venture Capital Is an Apprentice Business
Don’t expect to know everything right away, no matter how many books or mentors you have at your disposal.
“Venture capitalists are not made. You have to learn on the job,” Patricof emphasizes. “It takes time to be able to judge what would be a good deal, what doesn’t work.”
Failure to land a great investment right away isn’t the end—it’s a growth opportunity. And if you’re wondering how to become a venture capitalist who lasts, take those growth opportunities whenever they come.
7. Empower Entrepreneurs
Many VCs become overpowering and try to run the startup business themselves. That’s a big red flag for many startups, but it should be one you learn to recognize in yourself, as well.
“[Some VCs] get confused about their role,” Patricof says. “If you get too aggressive, the entrepreneur may just give you the key to the front door and say, ‘Here, it’s your business.’ The entrepreneurs have to feel it is their business.”
While it might sound great to have total control, remember that it’s not your role as a venture capitalist. If you want to run a company, become an entrepreneur. The best venture capitalists are partners, not overlords.
8. Develop Relationships with CEOs
Speaking of VCs as partners, don’t feel like you need to allow huge distance between you and your invested company. Leaders, in particular, will appreciate your (respectful) presence, advice, and even friendship.
“A CEO’s job can be very lonely, and a VC should be someone whom the CEO can talk to, confide in, and get constructive advice from.”
As a bonus, your own network will grow that much stronger.
9. Prepare for Adversity
Whether it’s fintech venture capital or food tech venture capital, you’re bound to run into some obstacles. These can come from without or within. This is where you’ll need a clear sense of purpose and vision.
“I think of myself as a doctor of investment,” Patricof says. “Every day, one of my patients is dying, and it’s never the same patient two days in a row. There are lots of problems for businesses—financing gets tight, people quit, the product doesn’t work. It goes with the business. You must be prepared to deal with that.”
10. Enjoy Diversity
The investment landscape is changing rapidly. Expectations of VCs today aren’t what they were ten or twenty years ago, and they’re surely not what they will be even a year from now. Part of that is startup founder diversity. The investment landscape is desperately in need of change. As a new VC, you can have a big part of facing that change—but only if you’re aware of the needs around you.
That won’t come down to just one thing.
“If you’re someone who can only focus on one thing at a time, don’t go into the venture capital business,” warns Patricof. “You have to deal with different CEOs, attend meetings, help with recruiting and financing, be a good board member, help with business development.” There’s much to be done even on a light day for top venture capitalists. The world ahead holds even more responsibilities for investors.
Alan Patricof on How to Get into Venture Capitalism for a Better Tomorrow
Listening to Patricof outline these ten tips, you can’t help but notice how basic they are, despite the complex risks of the VC business. The principles he outlines are tried and true: trust your instincts, surround yourself with good talent, build a network, think outside the box, learn from your mistakes.
But do these principles apply in other countries with different cultures? Can VCs transform a society?
“Yes,” Patricof says. “Entrepreneurship is critical to society today. New York and Los Angeles are exploding with startups, incubators, accelerators, meet-ups. The movement feeds on itself. Every startup increases employment, as opposed to a buy-out which lays off people. Ultimately, those companies that are successful, like Google and Facebook, spawn other startups. It is critical to have a vibrant startup community.”