3 takeaways from first 30 days as a VC

Pankaj Agarwal

With the closing of 2022, I finished one month with Prime Venture Partners, an early-stage VC in India. Previously, I was an early-stage operator and consider myself truly fortunate to have had a ringside seat at category-building startups in mobility, internet commerce and fintech and work closely with mission driven founders. I made the transition to the VC sector because it offers a unique learning experience by partnering and working with many such incredible founders. And while I don't yet fully consider myself one, I can now appreciate that being a VC has its own form of hustle and requires a different mindset to succeed.

My first 30 days have taught me a lot and I wanted to share some early takeaways in case other operators are curious about VC as a career. Hopefully, I will append these with a 6-month and 1-year version as I reach those milestones! More importantly though, I hope to provide founders with an operator's view into the inner workings of a VC firm and, specifically, how we do things at Prime. If this helps you prepare for your next pitch discussions even a little bit, I will consider it a successful undertaking.

Different kind of hustle, and a different mindset

Prime is a sector-agnostic, early-stage fund with a small investment team. We have a high-conviction investment approach and differentiated founder-partner operating model. In my last month here, I have reviewed a few dozen pitch decks across fintech, SaaS, logistics etc., sat through a few dozen pitch meetings, conducted 3 in-depth diligence streams - all which resulted in 0 investments. While it seems like a lot of work, I don't really have anything to show for it, yet. And this could very well go on for another month. This initially made the operator in me extremely uncomfortable.

In my previous life in early-stage cos, the first 30 days were focused towards understanding the business and key priorities. And typically, by the end of it, I could identify key metrics of growth, efficiency, hiring targets etc., to focus on and projects to drive over the next month/quarter. And then it was all about execution till I moved to the next challenge. Throughout, I could measure progress in real-time, iterate with short feedback loops and course correct whenever needed. In short, I felt in control and the work always offered instant gratification.

With a lot of helpful guidance, I realize that I can't apply the same mindset now. An important lesson Amit told me in my third week, “Your KPI is not TAT to make the first investment. You need to focus on the right inputs, develop strong relationships not just for deal flow but also "people flow", hustle to reach out to as many startups as you can, build and iterate on mental models to qualify for diligence, rinse, and repeat.”

In its truest sense, VC is a sales and business development career with much longer-term incentives structure! At the same time, being a VC requires genuine curiosity about technology and ideas to solve large problems with huge markets. It is by design a long-term play and needs patience, more so in Prime's high conviction and high concentration investment approach.?

There is a method to all the madness!

A VC hears anywhere between from 2 to 5 pitches a day depending on their weekly planning. Often there is context switching required throughout the week which includes covering different sectors, due-diligence work, outbound, portfolio work, events etc.

At Prime, we strive to be thoughtful and efficient in our decision-making and keep founders in sync throughout the process. And if for any reason, we decide to pass the opportunity we share the reason and feedback from our diligence, knowing fully-well that we can be wrong. Regardless of our decision, we pride ourselves in having a thoughtful interaction with the founders that we deeply engage with.?

With a selection rate of ~0.2% for a few thousand startups evaluated per year, VCs need a scalable decision-making process. Below is the "Five Ts" framework that we cover with founders during our discussions. Of course, it is impossible to have answers for all the areas at this stage. During diligence process, we are looking for clear spikes in 2-3 aspects - Team is always one of them! - and partner with founders in filling the gaps for the remaining ones.?

• Team: While generally important, it is even more so at seed to pre-Series A stage where we operate. We spend a lot of time understanding founder(s) insights and motivation and developing conviction on founder-market fit. The unifying theme behind the best pitches I have heard so far is that founders have non-obvious insights about the market and the customer segment. This is the most important criteria in our decision-making process.
• TAM: While making investment decisions, we try to get a sense of market size - addressable/serviceable/obtainable. The goal here is to assess if the startup has potential to achieve dominant position in a large and growing market. While the result of TAM calculation is a dollar value, arriving at that is equal portions of art and science and not always straightforward at an early stage. The reason behind most of the pass decisions is that we are not seeing what founders are seeing on the market size.
• Tech: Venture is a tech-focused undertaking and the role of tech in the business to create defensible moats is another important evaluation criteria. Is the product 10x better than existing solutions? Is the tech helping enable defensible business model advantages? Are there network effects at play for hyper growth and market leadership? Can the product create optionality for other stuff to be added on top of core offering?
• Timing: Timing the market is a bad investment strategy for public markets, and impossible to execute for most. Though in venture one must pay attention to the emerging trends, technology readiness, regulatory tailwinds etc. that can support new business models to be created. If invested too early, the startup might find it difficult to raise follow-on funding and die down. If invested too late, the fund will realize limited upside in its returns.
• Traction: The only aspect of the framework which has numbers and some objectivity associated. Though we have made few investments at the pre-traction stage where we could develop a high degree of conviction in the founder-market fit. Even with some traction, most of the startups at this stage are yet to prove out the elusive product-market fit. We analyze traction numbers - growth trajectory, retention, unit economics etc. - along with market diligence and business model to seek early signals and build conviction that the PMF will be achieved soon, and the startup will be well-positioned for next fundraise.

If done right, VCs can add immense value in a startup's success

VCs increasingly position themselves to the founders as "smart money", "value add", "partnership not just an investment" or some version of that. Interestingly, as per a study , VCs think they add 30% more value than their own founders think they do!

I reached out to many founders in the ecosystem to understand where they expect their VC partners to do better. One common theme they brought up was that VCs need to learn to navigate the fine line between support and interference. Even the most talented founders are going to be at 60-70% in terms of skills and knowledge needed for the business. And they are looking for the rest to be covered by co-founders, early member recruiting and value-add investors. And I believe if done right, VCs can play a critical role, aside from providing capital, in ensuring the startup’s success.

Seeking alignment early can ensure both founders and investors have the same expectations with the relationship. That means discussing upfront the growth ambitions, key milestones, exit plan and approach and, most importantly, the founders' needs and expectations from their investors.?

With the observations from working with numerous companies and much broader access, the main area where VC can add value is helping plug knowledge and network gaps for the founders. This can provide valuable inputs and access to them for strategy and business model design, recruitment, partnerships, international expansion, growth funding etc. Additionally, operator-VCs can provide learnings from their own experience on best practices to scale and mistakes to avoid, or at least learn from.

"We will discuss with you, debate with you, disagree with you, dispute with you but we will not decide for you."

Our partner Sanjay Swamy shares the above quote frequently with the founders we meet, and I think it succinctly establishes the role of a VC in the founder-investor relationship.