If you’re certain you understand the business, and you are confident your investment in it will succeed, what you’re doing is not venture capital, it’s banking.
Venture capital must have a high degree of risk in order to have a chance of earning the high returns venture capital investors expect from this asset class.
Venture capital doesn’t understand the startups it invests in.
Anytime you think you understand the business and the market in which it operates, consider whether you might be mistaken. That happens; you wouldn’t be the first.
Or, you might be investing too late in the company, or too late in what has previously been an emerging market sector but which is now plateauing.
Venture capital invests in businesses still figuring themselves out, in markets still to take off. Any later than that, and you’ve either failed to hear about it soon enough, or you’re too afraid to act quickly enough.
Venture capital doesn’t really understand the technology
If you think you properly understand the technology the startup has created, consider whether (a) you should quit venture investing to become a founder yourself; or whether (b) maybe you don’t.
Venture capital invests either in companies finding the first commercially-valuable applications for a technology, or in companies inventing new technologies that might be a better solution for a very valuable problem.
You might have read about it in WIRED, you might have watched an episode of “Silicon Valley” that referenced it, but you don’t really understand it. You couldn’t build this yourself and you wouldn’t even know where to begin hiring the team who could.
Venture capital doesn’t understand the customer
If you think you entirely understand the customer, the problem this startup solves for them and the marketing strategy that will acquire them at a sustainable cost, consider whether you truly do, in which case you’re about to invest in a startup committing the sin of being late-to-market.
Or, consider whether your market research has actually mostly been listening to your junior staff and your kids (who have a vested interest in making you believe you understand, when you actually don’t).
Venture capital invests in companies that haven’t yet figured out how to acquire paying customers at scale, servicing either nascent, poorly-understood customer segments, or servicing well-understood customer segments in radically different ways.
By the time there’s enough market research to know who the customer is and how to reach them, you are already in a maturing market and you’ve waited too long.
Venture capital doesn’t know how much to invest, and at what valuation
Any time you think you know how much the company should raise, the valuation, and the amount of time the company should make that money last, consider whether anybody could truly know that, or whether you’ve gotten used to having too much power in venture investment negotiations, for too long. Listen to the startup’s opinion on how much runway they need and what their burn rate should be. They may be just as wrong as you are, but going with them on this will keep them motivated and believing you’ve got their back.
And if you don’t have their back, you’re not a VC, you’re a banker.