Important Venture Capital Investment Tips to Live By

Let's face it: venture capitalism is not for the faint of heart. Instead, it's so cutthroat that most venture capital funds fail. That's why the more successful venture capitalists tend to focus on allying themselves with the best firms and investing in the entrepreneurial diamonds in the rough. To that end, we’ve compiled five simple, straightforward tips for up-and-coming venture capitalists. Of course, venture capital is much more nuanced than essential advice can provide; however, think of these as a solid bedrock of everyday things to keep in mind.

Before we get to the venture capital tips, we need to talk a bit about how angel investing compares to investing in venture capital. Firstly, angel investors are more likely to lose an entire investment, as they participate in an earlier stage of the funding process than venture capitalists. Secondly, angel investors spend their own money, whereas venture capitalists earn annual fees of 2% from their investors, plus 20% of the profits in an exit or liquidation event. Finally, venture capitalists will see and participate in more deals per year than angel investors, so their direct involvement with project founders varies greatly. Try to think of angel investors as enthusiast investors, whereas venture capitalists are more traditional calculating investors.

Here are our five venture capital investment tips, based on shared knowledge and tried and true methods. Investing can be a risky business, so please do as much of your research as possible until you feel genuinely comfortable with your decisions.

1. Specialize In Your Passion!

In general, venture capitalism is an extremely high-risk and sometimes high-reward business. That's why you'll want to ally yourself with firms that have a clear focus. If a firm is scattered across multiple ventures, its focus may be stretched thin. Think of the adage of “Jack of all trades, master of none”; try and find a master of one or a few. What’s your passion? For example, if your passion is healthcare, then you’ll want to pick out firms with a particular interest in that industry. Keep in mind that influential venture capitalists and firms will seek founders with remarkable insight and projects with niche appeal in their industry of choice. Don’t look for the firms that are a dime a dozen; look for unique projects with a considerable value proposition.

2. Look for High-Growth Segments from Multiple Angles

Consider this: what niche will your next big success fill? Industries and sectors with high growth rates are much more likely to be lucrative. Notice what's driving that growth. For instance, the business services sector is proliferating, thanks in part to the software-as-a-service (SaaS) model, according to Inc.com. Don’t get stuck in old ways; try and find new fast-growing ideas, and invest in firms that drive ingenuity and not stagnation. Look at things from multiple angles, historical trends, current events, and societal zeitgeists are all-important lenses besides pure financial data. For example, if a global pandemic is rumored to begin, perhaps look at companies revolutionizing work from home technologies. 

3. Focus On the Investment-to-Exit Ratio

According to the nonprofit University Lab Partners, the top six venture capital firms of 2020 have an investment-to-exit ratio of 20% or greater. This means that about one in five companies the firms invest in were sold successfully. This percentage does become much higher if you count only the projects for which a firm was the lead investor. For example, University Lab Partners cited data for the top venture capital firm, Intel Capital. Only when Intel Capital was the lead investor, 83% of its projects were sold in IPOs. Don’t lock yourself into looking at the big picture alone. Be sure to do some severe accounting and rely on finance experts you trust to give you the hard truth of whether a company is projected to succeed based on the hard financial data.

4. Treat Financial Data Like Good Wine

Pay special attention to Cambridge Associates data for a firm’s prior funds’ vintage year. In this case, “vintage” refers to all venture capital funds raised during the same year. Keep in mind that returns are highly correlated with the vintage year they apply under. You’ll also want to review all financial statements from current and previous funds, as well as quarterly letters. This meticulous perusal of financial data can be dry, yet financial statements do not lie. Give all past financial statement trends a serious look before investing in a company, even if you have a good gut feeling about the investment.

5. Watch Other Venture Capitalists

Before you ally yourself with anyone, notice their track record. Have they participated in good deals and invested alongside other successful firms? Or perhaps, even better, do other firms follow their lead? Maybe they’ve even returned three times the value or more of their investments. With these five core tips and following successful trends by other firms, venture capital can be a potentially lucrative investment avenue, even with its inherent risk. Being a follower, however, won’t set you apart as an investment. Finding investments that work well and coming up with your own methods of driving growth is an integral part of being a successful and unique investor.
For late-stage startups and established companies, venture capital funds are an alternative to crowdfunding trends. We are a reliable, confidential choice for verified investing services for issuers of Rule 506(c) and other private placement crowdfunding offerings for which accredited investor status matters VerifyInvestor.com, we will continue offering sensible advice for issuers and investors, so please follow our blog.