The venture capital industry is as asymmetrical an industry as any; the top 1% to 4% of venture investments usually get the outsized (10x+) returns.
This game of home runs leads fund operators to consistently bet on some of the world’s most innovative, and implicitly riskiest, companies in the pursuit of 10x, or euphoric 100x, exits.
However, this begs the question: is investing in the top 1% to 4% of deals the only way to succeed in this business? There are a few fundamental factors worth considering:
- Fund size: Smaller funds need fewer home runs to provide strong returns to LPs.
- Fund thesis: Funds with institutional LP capital are more driven by the need for high beta in their investments that optimize the potential for massive returns, but not all are driven by this thesis. Not all funds are necessarily unicorn hunters.
- Fund structure: A fund’s organization determines how it seeks returns. Suppose you’re a social impact investor or have an evergreen fund: your goal likely gravitates toward growing and recycling capital in line with your thesis, rather than solely providing outsized returns to LPs.
Regardless of fund size, thesis, and structure, achieving a return in the top 1% to 4% of all venture capital outcomes is a sweet melody for any investor. We’ve found that success in venture capital often distills down to two focal points:
First, finding and investing in the best possible entrepreneurs. Don’t get lost in the numbers and presentations; this is a people business. Venture capitalists are investing in people first, ideas second. We’re investing in people who we believe will build companies capable of positively impacting millions, if not billions, of people, increasing the standard of living across the world.
Finding exceptional entrepreneurs is a challenge in and of itself, and convincing them to work with you over their other options only adds to the difficulty. Top venture capital firms can credit their success to a combination of technical and subject matter expertise, market experience, leadership potential and capabilities, and a unique charisma that attracts and energizes diverse talent. These firms tend to have one or a mix of the following: an indisputably compelling value proposition, an impressive track record, and a robust and diverse network.
It’s not always clear which entrepreneurs you invest in will become the leaders you hope they will. There are many factors at play, many of which are outside the entrepreneurs’ control. This leads us to our second focus: supporting and amplifying the talents of your entrepreneurs.
The relationship between investors and founders should increase in velocity, not stagnate, after that first check.
Investors must focus on mentoring, coaching, and accelerating their entrepreneurs. Venture capital success is more profound than just finding and acting on the upper echelon of deals. Investing in amazing founders is more visceral than merely providing capital; it necessitates adding value at every possible step in their journey.
The savviest investors have a keen eye for finding actionable inflection points that increase the likelihood of building a meaningful company.
This brings us to a few important notes: how does one find the most capable and highest-potential entrepreneurs? How does one maintain a diverse and robust network in a rapidly evolving venture capital landscape? Most importantly, how is an individual investor able to consistently bring the absolute best version of themselves to every interaction?
There isn’t a black box of VC secrets or some perfect universal blueprint to follow that will propel any firm into that rarified air of lucrative investment opportunities. However, we believe that there is a framework to help guide investors and accelerate their growth faster.
The Kauffman Fellows Four Pillars are a distillation of the traits, characteristics, and behaviors that we’ve learned from the best investors in the world over our 25-year history.
Pillar #1 Radical Self-Belief and Conviction
Many of the best investors in the world invest because of conviction, not because of consensus. Following the pack because of FOMO usually leads to average or subpar returns, and the best investors actively work to recognize and immunize themselves from a herd mentality.
Historically, the best investment opportunities (many of those 100x+ returns,) are often the non-consensus deals and non-intuitive ideas and companies.
The top investors have radical self-belief and a willingness to bet on themselves, especially when the odds seem stacked against them.
Radical self-belief requires tuning your perception to your conviction, not merely writing a check because of a good idea on someone else’s blog or co-investing with other top tier VC firms.
Radical self-belief demands the cultivation of a voracious desire to learn and become an expert in your industry. This requires both having sincerely held beliefs and passions and continually challenging them through rigorous formal (and self) education and experiences.
Radical Self-Belief and Conviction allows you to find your “Zone of Genius” as an investor. Think of the Zone of Genius in terms of the four zones of human operation.
- Zone of Genius: What are you uniquely qualified for? What comes naturally to you? What makes you passionate, and what for? This is the peak of your operational understanding.
- Zone of Excellence: Iterating on and further researching what you understand will eventually elevate you to a Zone of Excellence.
- Zone of Competence: The Zone of Genius framework requires you to map out your understanding of your own incompetence, which will help refine your actual Zone of Competence.
- Zone of Incompetence: How many of us truly understand what our Zone of Genius is? Most don’t, so admitting a lack of depth in your experience is the first step.
Operating in your Zone of Genius feels like you’ve rigged the system, and you have an unfair advantage; you can’t believe you’re getting paid to do this type of work! You’re in your flow state. The Zone of Genius isn’t a superhero power one is born with, but rather a skill or set of skills cultivated quietly through consistent practice and learning.
Your goal should be to operate in your Zone of Genius about 70% of your waking time, but very few humans will come anywhere close to this level of optimization. That’s where lifelong dedicated training comes into play.
Pillar #2 Unique Investment Thesis
An investment thesis is more than defining a sector or market based on experience or interest. Top investors tailor their passion and convictions to an investment thesis that guides every investment they make. This guiding framework helps add structure to an otherwise nebulous barrage of potential investment considerations.
However, the best investors understand their Zone of Genius and unique personality traits that lend themselves favorably to a thesis strategy. Radical self-belief and conviction lead to the natural development of a novel investment thesis.
A thesis isn’t static: you may end up revising it dozens or hundreds of times– much like product life cycles in a highly connected world with rapidly changing technology environments.
Being aware of your Zone of Genius and its role in your investment thesis allows you to make educated and proper iterations.
Pillar #3 Personal Brand
Your convictions, expertise, and investment thesis start to take form as your identity– the outward-facing version of yourself to other entrepreneurs and investors. The cumulative thought devoted to the first two Pillars becomes your Personal Brand.
The idea of a Personal Brand has recently become mangled in false quantifications like Twitter or blog followers, but it’s much more than that.
Kauffman defines Personal Brand as the “Promise of the Experience” when interacting with you as an investor.
How do you treat people?
How do you show up to every interaction?
What are you known for?
What are you good at?
What can founders learn from you?
For example, if I’m a founder seeking investment, do I get a response in 24 hours or 24 days?
Is your response one that displays a high level of intellectual curiosity? Does it ask good questions that show genuine interest and a desire to learn more about my company and me?
Or, is your response short, uninformed, jumps to conclusions, and leans excessively on surface-level analysis like “pattern recognition?” Does it make sweeping generalizations or assumptions about the market or business model? Absent of intellectual inquiry, is that response tethered to ill-informed statements?
Those two examples show two different personal brands, and there are plenty of examples in the capital formation ecosystem today.
Our role as investors might change in Pre-investment (see, pick, and win the deal) and Post-investment (add value, return capital to LPs), but both phases are impacted, if not totally driven, by your personal brand (especially when picking and winning the deal.)
A personal brand can take years to build, yet can be dented by just a single poorly thought-out email.
The intention and presence rooted in your radical self-belief and conviction demand you to bring the best version of yourself forward at every possible opportunity. Protecting, refining, and evolving your Personal Brand is a lifelong process.
Remember this: You will typically have over 1,000 interactions in any given year. Three of those interactions will change your life, but you have no idea which three. So, how will you show up to each interaction you have?
Pillar #4 Human Dynamic and Talent Environments
As an incredibly relationship-centric business, venture capital requires building and maintaining deep relationships built on trust. VCs regularly interact with the diverse group of constituents in their “Talent Environment”, such as colleagues and partners at their firm, Investment Committees, founders, board members, syndicate partners, LPs, ecosystem leaders, incubators and accelerators, and so on.
The Fourth Pillar urges one to master the Human Dynamic. Ultimately, everyone you deal with is driven by different motivations, and navigating them isn’t a skill that comes naturally to most. Highly-evolved active listening and communication skills are the bedrock of optimizing the relationships within a Talent Environment:
- How do you communicate?
- How do you best receive communication?
- What is the impact that your communication style has on others (both intentional and unintentional)?
- How do you employ active listening skills in your conversations? Active listening is vital, but it isn’t a natural skill.
The Fourth Pillar is such a significant advantage, but it’s also arguably the most challenging piece of the framework. It requires a deep unlearning and relearning of communication in a dynamic environment. We’ve even dedicated a significant portion of the Kauffman Fellows program as a “behavioral fitness” intensive to build those critical skills.
We believe that most people spend the bulk of their time tacking on surface-level improvements to their investor acumen, and unfortunately, neglecting the real work at a deeper level. Our program is designed to pluck rising stars out of their daily routines once a quarter and help them re-focus with this proven framework.
The Four Pillars are the introduction to the framework for success in venture capital; at least how we see it.
While venture is a very people-heavy business, success is often measured on a spreadsheet– not by how many people you know or who know you. It’s not measured by your Twitter followers, speaking engagements, or blog posts. However, we view spreadsheet success as a by-product of your personal skills and the strength of your network. Doing great deals is the key to this business–and that’s not easy.
Further, you need more than just a “network.” You need a reliable “trusted diverse network” that helps with formal business elements like deal flow, diligence, follow-on financing, talent hires, customer partnerships, and so on. This network provides invaluable support in a myriad of ways: it’s a resource for the “dumb questions,” direct and objective feedback, troubleshooting complex issues, all while holding you to a high standard, pushing you, and challenging you when nobody else will.
This network is a rarity, and we’re proud to say these characteristics define the Kauffman Fellows Network.
Occasionally, we’ll hear from candidates that they don’t need Kauffman Fellows because they already have a good network, to which we add– of course you do, that’s why you’ve been successful to this point in your career. Most investors have a professional network or they wouldn’t be good at their job.
Kauffman Fellows is proud of the strength of our network. We just celebrated our 25th anniversary, and the results thus far have been astounding:
- KF Returns: KF investors have an average realized multiple of 5.8x when the industry average realized multiple is around 2.6x. That’s more than doubling the performance of the industry.
- Networks matter: Our KF Research Center researched the power of networks in VC and found that if you have a Top 1% network, your average realized multiple is 10.86x. A top 10% network drops down to ~6x. So, the 10x+ returns that we’re all seeking in this business are really dependent on your network strength.
- Persistence: Kauffman Fellows have been in the VC industry for 15+ years post-Fellowship (and this is slightly higher for women than men), which is more than twice the average number of years it takes to recognize success in this business.
The Four Pillars is our view of the framework for optimizing success in venture capital and life; these principles can be applied to any profession or personal pursuit to great effect– they aren’t exclusively limited to just venture capitalists.
On a closing note, we’ll leave you to ponder these questions:
What have you discovered as the essential principles for success in your role?
How do you make the time to focus on optimizing your life around these core principles?
Are you surrounded by like-minded individuals similarly striving towards propelling personal and professional change along with the same goals?
The primary goal of the Kauffman Fellows program is to provide a similar asymmetrical upside as investing in a unicorn company in the pre-seed stage; the days you invest in essential principles built on the experience of over hundreds of successful Fellows over twenty-five years provide a return of months, or even years, of efficiency and growth.