Most common mistakes made by commercial venture capitalists
Gathering the wrong LP syndicate
I see this a lot in Asia where a GP (general partner) will focus on the amount aggregated to run the fund but ignore the origin of the liquidity. Creating the wrong LP (limited partners) syndicate can not only lead to a vast perversion of your term sheets – pushing opportune deals organically away from your firm – but also create the wrong relationship dynamic between VC (venture capitalists) and LP.
Mismatching the investment team size to fund amount
The investment team size will either be too small or too large, so that the economics and efficiency of the firm goes out of the window. If you run a 100 million USD fund for a 8+2/7+3 in 2015, I’m not sure that having seven investment partners looking after three portfolios is the most effective way to execute management and development.
Starting operations in a place where deal flow is either not plentiful or does not fit the firm’s focus verticals
Again, this is something that is seen in South East Asia, where you see large scale funds being born out of markets that can neither support that sort of deal flow comparably or have the kinds of deals that the fund memo states.
Injections for the sake of matching deal timing
With the above, we see firms being sluggish with their executions, and dragging their feet on realigning with LPs to expand geography and focus. As the fund life cycle matures, VCs become impatient and highly cognizant that by year 5-7, most of their bets should be in the pipeline and they thus start to inject aggressively, feeling the higher opportunity costs for not getting all the liquidity in deals than doing one that they are not completely comfortable with.
Relying overtly on social proofing to cover investment risk
The lack of deal flow referenced above also lends to a ‘piling up’ of syndicates in a bid to lower mid-term risks of investment. The ironic part of a syndicate pile-on is that it requires higher and higher valuations to justify each of the investors’ IRRs (internal rate of return) and hence actually has higher potential to induce failure in a startup by preventing more opportune – but earlier – exits
Most common mistakes made by corporate venture capitalists
CVCs (Corporate venture capitals) are notoriously slow and often hobble the closing process. I’ve seen my share of injections come to a standstill while the CVC tries to get the neccessary approvals for even a slight change in spec.
Having the wrong investment committee
Getting the wrong people on board to green light investments can probably be one of the most cardinal missteps a CVC GP can make. It just breaks all the processes down and is the seed for tarnishing the CVC’s reputation in the ecosystem. To articulate this, a ‘wrong committee’ member is defined not only as a person who is not related to the core activities of investment but also individuals with political agendas or aspirations that run counter to that of the investment thesis of the fund/ firm.
Handing out shitty term sheets, knowing that they are shitty term sheets
Probably one of the most critical timings for an investor to build trust with the founders is when a verbal deal is struck and term sheets are passed around. If you are the CVC GP and handing the said sheet out in SV (Silicon Valley), and you are leading the round and firm, ask some participating VCs whether the terms are contemporary, and use some common sense for god’s sake. You know that liquidation preference with participation is non-standard in 2015, so don’t do it and then blame it on the template or your lawyer.
Trying to inject corporate agendas that do not add value to company’s growth
Less mature or unstructured CVCs are more or less the strategic investment arm of the corporations. I’ve seen companies try to force synergies onto companies that add no additional traction to the startup and are at best a singular win for the investing company.
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