9 Venture Capital Principles For Extraordinary Growth

As a business advisor and former angel investor, I often get asked how venture capitalists (VCs) pick winners when they invest, and what to look for in innovative new growth opportunities. Everyone seems to recognize that existing business are very slow to innovate internally and often get overrun by new startups funded by venture capitalists and other savvy investors.

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I’ve always had my own view of good investment practices and venture capitalists, but I was pleased to see some excellent case studies and examples provided in a new book, “The Venture Mindset,” by Ilya Strebulaev and Alex Dang, bringing both academic expertise and years of experience with the venture capital process, growing businesses, and investing in Silicon Valley.

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They have distilled the investment process into nine principles, which I have paraphrased here, with my own insights added. I believe these could and should be used by any business, large or small, seeking innovation and new growth opportunities:

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1.???? Swing for the fences and learn from every failure. Successful VCs adopt a home-run approach. They make relatively small bets and expect failure as a normal outcome most of the time, but when they win, they win big. Their mindset is that missing a 1000X opportunity (like Google) is a nightmare worse than backing a passionate loser.

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2.???? Scout for opportunities rather than wait for them. You won’t find great ideas to invest in by waiting for them to appear at your doorstep after seeking you out. You and your team must network constantly, like VCs, to pursue promising entrepreneurs, startups, research labs, experts from your sector, and listen carefully to customers and the market.

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3.???? Pick your battleground and get prepared to play. Before you invest, you need to pick defined areas, topics, and white spaces to focus on or skip altogether, to prepare your mind to evaluate innovative ideas with speed and accuracy. Be wary of ignoring unusual startups, dismissing people who don’t fit the pattern, and letting your bias show.

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4.???? Be selective and willing to say ‘no’ many times. Don’t hide risks. Bring them to light early-on in a concise document called the “investment memo” which explains the logic of an opportunity and positions the deal within the context of other alternatives. It must provide insights into key issues and costs, and recommend a position of either yes or no.

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5.???? Bet on the jockey and team, rather than the horse. Smart investors know that ideas are a dime a dozen and execution of the idea makes all the difference. Most ideas will have many teams and leaders in play, but only one or two will succeed. Look for people with charisma, leadership attributes, uncommon determination, and relevant experience.

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6.???? Encourage dissent and be wary of consensus. To ensure that the opposite view is heard, smart investment teams make it a standard practice to assign one person or a small team to the role of contrarian. Support innovative outliers, promote debate, and do not force a consensus. In the end, all must support the decision even if some disagree.

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7.???? Be willing to pull the plug faster and more often. Make sure you have a process and schedule to regularly defund and close initiatives that are not working. This is equally important to defining start-up milestones and progress metrics. Regularly consult with external stakeholders and experts at key project milestones. Move quickly with new info.

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8.???? Provide creative incentives to make the pie bigger. Making everyone in the mix an owner is a proven incentive to grow the opportunity and take the necessary risks to assure success. Rewarding boldness and determination is key, while maintaining relevant controls and ability to pivot as necessary to adapt to new market input.

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9.???? Look past short-term gains for long-term returns. Be aware that long-term thinking changes how we behave, like making people more willing to incur short-term losses, or increasing patience. Long-term investors worry about the future market size, natural and unnatural disruptors, and legacy impact.? Beware of near-term exit incentives.

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Using these principles, you too should be able to better spot new opportunities, make smarter bets, and lead your business in achieving extraordinary growth. We all need more help to thrive and survive in this chaotic market environment of today.

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*** First published on Forbes on 05-21-2024 ***