Chasing Venture Capital Experience

EIGHT THINGS I HAVE LEARNED THE HARD WAY

You can’t fast track experience, but you can learn from others

Financial success in venture capital is based on experience and of course the hand of fate in combination with great timing. Nonetheless, without in-depth experience you might be better off spending all your money in an air-conditioned casino with some drinks and entertaining company surrounding yourself.

Within the past years I have been trying to extract and gather the essence of my venture capital learnings, mainly because I don’t like casinos. The truth is betting the odds is only fun if you have an unfair advantage, in venture capital the secret sauce is experience, for sure. I learned a lot from some outstanding people I have worked with along my journey, aside of all the crucial first hand experiences I made myself.

Therefore, I would like to share eight things I have learned the hard way.

Entry valuations only matter up to a certain degree, at the end of the day startup valuation is a mixture of performance and the broader market climate for peer opportunities. Yes, generally it is beneficial to pay a lower valuation, though the cheapest deal is not necessary the best deal, especially in the context of exit potential.

The economic return of a venture capital investment fits a power law distribution, the outcome is binomial, startups succeed or fail. If you invest into a startup with a fairly low entry valuation and a low exit potential, you will be worse off than paying a higher entry valuation with a greater exit potential. Experienced VCs try to understand exit potentials, instead of negotiating entry valuations.

I think it is even worse to apply entry multiples, I am not really sure why multiples became a shortcut heuristic to estimate startup valuations anyways. Forecasting the size, timing, and risk of cash flows over many years is fairly challenging and highly inaccurate, even for later stage startups — relying on multiples as a proxy for the value of a…

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