If you’re like me, you probably can’t remember a lot of what you learned in high school. I couldn’t do a geometry proof right now, tell you anything meaning about proteonic bonds, or wax poetic about any number of books I consumed in English class. Yet I do remember one line from one book, the American literature classic To Kill a Mockingbird. In Harper Lee’s classic, the esteemed lawyer Atticus Finch makes the following claim,
“You never really understand a person until you consider things from his point of view… Until you climb inside of his skin and walk around in it.”
While this statement can surely be applied to any number of areas in our lives, I’ve been thinking about it a lot in the context of the entrepreneurial world, where I believe it offers a great deal of wisdom.
People doing startups are inherently passionate and quite often borderline manic in their focus on trying to build a successful company. This type of intensity can lead to situations in which entrepreneurs are blind to the relevant factors of the “real world”. There is a tendency to be so “in the weeds” of a particular project that it’s very difficult to think rationally or realistically.
This can perhaps best be unpacked by looking at the fundraising process. Oh, how many entrepreneurs have stories about the “horrible” venture capitalists who “just don’t get it” and “aren’t interested in taking any risk.” Now, there are certainly risk-averse VCs and plenty of situations in which this may be true. But it’s instructive for entrepreneurs to take a minute and “climb inside the skin of a VC” to truly appreciate the reasons that many make the decisions they do.
Imagine for a second that you have raised a meaningful pool of capital in a VC fund that you intend to deploy into 10-20 bets. The pitch that you, as a venture capitalist, made to your investors (remember, of course, that VCs typically have to raise their own money from institutional limited partners) is that you will be able to generate outsized returns that will beat the alternative investment options (which have more liquidity and less variable expected returns). In order to make the 2% annual management fee and long life span work - mathematically - you will need to return 2-3X the total fund size over time. So if you raised a $50 million dollar VC fund, you need to turn that into $100 million+ to justify your existence. And you only get 10-20 bets to do this, with the added degree of difficulty that once you make the bet you’re relatively pot committed for a prolonged period of time. In other words, it’s hard to “pivot” as a VC.
In light of this, the extremely narrow screen for a VC to make an investment is a little easier to understand. And it’s also an important contextual piece that you absolutely must understand when pitching your business. How do you convince the investor that your venture can indeed become that fund-maker, that deal that will help them justify their own existence? For instance, you may “only need $1 million” to make your company a huge success. But does this coalesce with how the fund you’re dealing with will succeed?
Figuring out how you fit your narrative into the VCs own narrative is crucial, and may require taking a step back to “climb inside his skin and walk around in it.”
Note: The importance of living this out is not limited to entrepreneurs only…in Part II I’ll take a look at how other players in the ecosystem can follow this advice as well.