I spent the week before last (at time of writing) in Croatia on boats with a bunch of European venture capitalists, courtesy of Draper Esprit, Partech and Episode1, who sent me. While on the trip, I spent a fair amount of time mulling over whether this was just an excuse for people to take time off work in a hot country, or whether there was a real business case for the trip.
Spoiler: It was a great excuse to go on a hot holiday, but… there’s more to it than that.
OK, not much work, in the traditional sense of the word, was done, but that certainly didn’t stop the trip being extremely valuable for work.
Early-stage venture capital is almost entirely people-driven – that’s why I love it and also, ironically, why the industry will likely be amongst the last to be taken over by the technology we invest in. For now at least, computers aren’t good at determining what a good early-stage investment looks like (often not the case for public market investing).
The value from the trip was entirely in building a network, which is such a critical part of being a good venture capitalist. I believe the importance of an effective network broadly falls into the following categories:
If you look at the investments we’ve made at Episode1, the majority come from personal referrals. This is no coincidence. People who know us well, know what we like and therefore pass us pre-vetted (by them) deals which they think we should look at. These deals historically have a high hit-rate compared to other forms of deal origination.
Part of an investor’s job is to make the right introductions to potential next round investors. This is particularly the case at seed stage because Series A investors may not know about every promising seed company in the market (there are so many of them). By having a good relationship with many funds who trust you, any deals you pass them are automatically treated as pre-qualified. As a side-note, raising a seed round with a top-quartile investor considerably increases your chance of a series A (interesting but also subject to being ‘correlation not causation’).
Of course, it’s not just down to being mates with someone at a given fund. This particular network has to be built on a foundation of trust and track record, individually or as a fund. Once this bar has been met however, being friends is naturally a great help in securing your position at the front of other investors’ minds.
Intel, DD sharing and insight on deals and funds
This week I’ve been chatting to a friend at another fund about a deal we’re working on. They happened to have met the company six months ago and the deal wasn’t quite right for them at the time. He raised some interesting points about the company and allowed us to get a feel for the progress the team have made. The associate in question has done a lot of research on the space and was happy to share some of that with me, making our lives a bit easier, and our decision better informed.
So there are some reasons for why to build a network, but how do you build this network and how much time should you spend developing it, in amongst all the other things you need to do.
I don’t have a silver bullet, but here are my thoughts, mainly specific to venture capital.
Time management is hard, so is networking a priority?
Looking at my calendar over the last six weeks, I spent 23% of my time (c12h/week) meeting founders, and 10% (c5.5h/week) with other VCs. I used to spend far more than 12h/week meeting founders, but found myself in lots of hour-long meetings with companies where it quickly became obvious we weren’t going to invest. Now I do a bit more DD (phone call or email exchange) prior to meeting them and it’s freed up a lot of time to do other things. I consider networking to include meeting both entrepreneurs and investors. The best entrepreneurs will likely build something great eventually, even if it’s not this time around. So keep in contact with them and they’ll hopefully come back for a second try.
Openness is important
Thinking about the most valuable people in my network, they are generally the more open ones. Once you trust and like someone, being open with them is a really easy way to build a close relationship. Telling them about a few really good companies you’re looking at without being cagey, and asking them for their views, is a good way to show peers you trust and respect them. This will lead to co-investments and will also provide access to important market intel, such as that which I mentioned earlier.
The elephant in the room: If I share good deals, people will steal them?
I suppose this is a risk, but I think the balance is very much in your favour. Most people won’t steal your deal, especially the people you’re open with – the people you like and trust. If they do, they’ll very quickly get a bad name in what’s a very closely connected industry. Just pick who you’re open with wisely.
Focus on non-competitive funds for dealflow
Competing funds won’t usually share their best deals with each other unless there’s a benefit to doing so, like sector expertise or complementary companies in the other fund’s portfolio.
So the best relationships to nurture are often those with funds of different stage or sector focus. I’ve found my most promising relationship-driven dealflow to come from:
These three groups have an incentive to share their best companies with us and so make a concerted effort to do so.
The final thing to mention is something that I think varies from person to person. I prefer to spend lots of time on fewer relationships, rather than spreading myself too thin. Some people prefer the latter but I think that you’re more likely to collaborate and deal share with people you’re genuinely close to. I think the strength of those few relationships is worth more than you will get from being everyone in the industry’s vague pal.