The investment period is arguably the most active period in a VC fund's life. During this time, the GPs and their teams are sourcing and evaluating potential investments, conducting business and valuation due diligence, negotiating term sheets, and closing deals. It is not uncommon for partners and employees of a VC fund to review hundreds of company pitches a year while making only two to three investments during that period. Principles and associates typically play the gatekeeper role sourcing potentially attractive investment opportunities for the fund. This team will tend to sign off on an investment opportunity before it reaches the GP, assume that they filter out at least 90% of the pitches they review on the investment team. They are several key roles, VC investment analysts. These are junior staff that support the research and data analytics on startups, industries, emerging trends, et cetera. They will also assist the principles and associates in screening company pitches. A VC fund may also have an entrepreneur in residence or EIR. This is an experienced entrepreneur with a strong track record of founding a successful startup that has also had a successful exit. This experience can be considered hugely beneficial when looking at new investment opportunities.
The EIR may be an alum of the firm and in some cases are an LP in the fund.
VC funds have a diverse team compliment to support the investment process. In addition to the LPs and GPs already discussed, a VC fund may have managing partners or technical partners like chief financial partner, chief technology partner, chief HR partner, et cetera, which manage the operational activities of the VC fund. Keeping the fund administration and planning ticking over is a key part of running a successful VC fund.
When it comes to finalizing an investment, the investment committee at a VC fund ultimately decides to invest in the startup company. This typically consists of the GPs, but can also include EIRs, chief financial partner, or others. The potential investment must satisfy their investment criteria and will have been checked carefully by Both the junior analysts and the directors within the VC. Many meetings between the VC team and the target company may have taken place before the final investment is made. While each VC fund may have their own investment thesis or point of view, which informs their investment process, the investment criteria is typically some variation of the following industry. This is usually driven by the expertise within the team, but the typical venture capital preference is for high growth potential industries, which can offer strong returns to investors.
Market size is also a key investment consideration. The investment team must consider the maximum addressable market for a business. This represents all the potential customers within a target market, and a maximum serviceable market is the portion of the addressable market that can be profitably reached. Both need to be large or offer compelling growth opportunities.
The management or founding team is an important consideration when looking at investments. Most VC funds are biased towards founding teams that either come from a previous successful startup or have extensive industry experience. Although this is highly subjective, VC funds are looking for individuals that possess vision, leadership, tenacity, and that demonstrate an ability to be coachable.
Finally, product VC funds will also expect to see a compelling and disruptive minimum viable product, MVP and a plan and vision for how the product will evolve.
The analogy of the horse and jockey. In VC investing, we can use the analogy of a horse and jockey. It's considered that investment is made in a horse, a business, but it's equally, if not more important to ensure that the horse has an experienced jockey, CEO or management team on board. The idea is that a successful and experienced jockey can bring the best out of most horses and can enable it to win, even if it may not be the best horse in the field of runners.
