As we always say, to make mistakes is to be human. And venture capitalists (VCs) are no different. They are humans and they do make mistakes. Did it strike you by surprise? Indeed, we are so conditioned to read and hear about the errors committed by entrepreneurs all the time that the simple thought of VCs making blunders might seem incredulous.
If you are a VC thinking to make smart investments, it makes sense for you to spare some time in digging up the most common mistakes investors usually make and what you should do to avoid falling into the same pit.
- Playing hard to get or being condescending
Many VCs have this innate habit of playing hard to get and in doing so, they run a high risk of losing out on a number of great business ideas. While being a little demanding is fine, basking perennially in the state of being hard to get is not. It can, in fact, be detrimental in the long run and might just mean missing out on a lot of potential projects. Also, being overly demanding before a meeting is one thing whereas deciding to finally meet up and then behaving in an obnoxious or condescending manner is a different thing altogether. Such an intimidating VC not only ends up making life hell for the entrepreneurs (who still happen to work with him) and drives the rest away. Therefore, it is in the best interests of the VCs to be approachable and open to disruptive ideas.
- Taking a lifetime to make a call
As Micah Baldwin has aptly said, “Don’t take forever to make a decision, but don’t make it too fast”, it is fine to spare a few moments to do some research around a potential startup and ascertaining its worth. However, making it a part of your daily life before you actually make a call is nothing less than disastrous. Experts believe that if you have knowledge and expertise on a prospective startup’s domain, you should ideally make a call as early as in 20-30 minutes. Of course, this rule changes when you are a newbie to a particular domain or are going to deal with an extremely new idea. Nevertheless, you still cannot choose to take a lifetime to make a call, lest you want to run the risk of losing out on something amazing. Also, often overzealous or new VCs jump into discussions with too many startups without being able to make their mind for any. This, in turn, wastes a lot of time for entrepreneurs who could have devoted their time with a more decisive investor.
- Investing in a vision rather than the actual product
Many VCs, especially inexperienced ones, make the horrendous mistake of visualizing a product or an idea for what it might not be in reality. As they say, you have to live it to master it. Therefore, the understanding of whether a startup’s vision matches that of yours or not (or whether a startup is capable enough to fill in the gaps as it proceeds) only comes with experience and after several hits and misses. Many VCs invest in mere ideas without thinking twice about the lacunas in the actual product or team or market. They tend to imagine that they would be able to shape up the startup or fill in the gaping holes with their vision and expertise as they move on. Needless to say, this is an extremely risky approach and leads the investors to a sorry state of affair more often than they would fancy ending up. While one might argue that this is a part and parcel of an investor’s job, a safer bet in such a situation might be to make small investments rather than putting a large amount of fund in a sticky idea.
- That thing called ‘dubiousness’
Isn’t it obvious to check every aspect of the business in question before putting one’s stake in it? True. But many a times investors tend to (or choose to) overlook this all important part in their excitement or desperation to put their money into play. Needless to say, this not only results in bad deals for investors but can also end them up in massive losses. Therefore, it is essential to conduct a background check of the business, its products and the people involved in order to safeguard the investments in the long run.
Being a VC is not a cake walk. It’s a tough job which demands undertaking extensive groundwork and developing a 360 degree vision to all the forces in the market, which may – at times – falter a little. But with adequate research and proper guidance, most falls can be avoided or rescued.