Venture capital is not exactly known for its humility. With the explosion of new firms accompanied by the next generation of managers, there is an opportunity to change this image. A chance to turn VC into something more humane and approachable. But is the industry’s long feedback cycles and personal brand building (without cash returns) turning emerging managers egocentric almost by default? Let’s unpack why it seems so hard to keep your ego in check when you are funding the future.
As someone who entered the industry recently, I’ve experienced the ego trap first-hand. Not long after launching my own fund, I started experiencing days where I feel like the master of the universe. Days that go something like this:
I open my laptop. The first thing I see is that news article I gave an interview with last week is online. Also, the smart tweet I thought of in the shower this morning has now been retweeted multiple times. This is great for my personal brand!
Wait… Is that a cold email from a founder? Are they expecting me to respond to that?! If they are good, they will know how to reach me via an introduction. And don’t even get me started on that tech event I’m going to later. Most people there are clueless. Thank god I’m speaking, such that I can develop my personal brand.
But when I leave my office for the day, I’m normally brought back to earth by my inner voice whispering “how much money have you actually returned, Christian?”. I spend my evening replying nicely to the cold email and writing a follow-up to the person I met at the event earlier.
Ego is one of the greatest enemies you will face as a VC. It’s what prevents aspiring young VCs from becoming great investors. It tears apart even established firms. It’s the monster hiding under every investors’ bed, ready to pounce at your weakest moments. But why does the monster exist? And how do you stop it from growing stronger?
Social Capital and Returns
The feedback loop in venture capital is really long. It takes at least five years to know if you’re good and 10 to know if you’re outright great. That’s lots of waiting, especially since you need to attract good founders before being an early investor in five unicorns. Also, you’ll need to raise a new fund every three years without cash-on-cash returns, thus building a personal brand seems like a solid idea.
So here we are. You unveil your fund with great fanfare and TechCrunch is covering the launch. The whole internet seems to be talking about you that day. But while you frantically update your browser tab to see if more people retweeted your story, your ego is slowly growing in your subconscious mind.
The problem with social capital is that it’s a flywheel that just keeps going. Media mentions turn into Twitter followers, which turns into speaking gigs at big conferences. Before you know it, everyone is constantly stroking your ego. The feeling of importance becomes part of your identity and without admitting it, you’re finding ways to constantly get your fix. Power corrupts even the purest souls. However, you have yet to complete the job LPs entrusted you with: returning capital.
Does this mean you shouldn’t build a personal brand? Absolutely not. Building a brand is a strong way to accelerate your deal flow, especially when you are starting out. It adds credibility with entrepreneurs and other investors. But you should realise which things actually serve your deal flow and which are just feeding your ego monster. Before saying yes to stuff it’s important to ask “am I serving my return potential or myself?”.
The key to building social capital is understanding what has utility and what serves as purely ego building. As a rule of thumb, seeking social capital that allows you to express opinions about specific subject matters will help you carve out a strong position within a specific niche. Almost everything else will most likely be servicing your ego while masquerading as personal brand building. Overdo it and it becomes the start of your demise as an investor.
The Illusion of Power
One of the most common things you’ll hear VCs brag about is their ‘acceptance rate’ (screened/investments). It varies, but typically it will be between 0.5–2% and most investors say no a lot, as seeing +1000 deals/year is not uncommon. It feels like landing an investment from you is exclusive and reserved for exceptional founders. But is it necessarily proving that you have great deal flow?
No. Because of power laws. It’s unclear what the exact return distribution looks like, but the most common notion I’ve heard is that the top 5% of companies return ≈95% of capital. That’s steep. It’s even worse if none of your 1000 screened companies falls within the top 5%. In that case, your picking among losers. Your investments feel exclusive, yet are never going to return meaningful capital. However, you won’t know until 10 years down the road. Such is the cruel nature of venture capital. Don’t get carried away.
In my experience, a more useful way of assessing deal flow is to track the deals you miss but should have seen. To me, those are the most painful and decreasing that number is how I’m improving my deal flow. Before you’ve made sure you’re meeting the best founders, more companies at the top your funnel won’t improve your chances of funding an outlier. Like any methodology, this has its flaws but will help you stay humble. Don’t optimise for the vanity metric of ‘acceptance rates’.
Self Selecting Egomaniacs?
As you have read this far, you’re probably thinking: “Doesn’t venture just attract big egos, period?”. There is some truth in that statement. Most people have had previous success and plenty of connections prior to raising a fund. Who gets to be a VC is very non-meritocratic in that way. However, previous success does not necessarily result in a big ego and the people rising to the top in any industry, are typically those most humble.
But since people tend to start funds at the height of their career, there is an argument for baggage being carried over. What seems universally true for all great investors though, is understanding what you don’t know. With a strong sense of self-reflection, you’ll quickly learn that becoming a great VC is incredibly hard. Very few people make it. Leaving your ego at the door is a vital first step to be among the few that do.
Understanding why someone became a VC is a good way to scan for big egos as an entrepreneur. Does the answer seem to be “because they knew some people willing to give them money” or “it’s what would impress their friends the most”?. Probably not the best sign. Look for people that are genuinely curious about your business, technology, and discovering what they don’t know.
On a Closing Note
When I started my fund I was 25 years old. Automatically, you know very little about anything and have no meaningful network. Your only way of ‘surviving’ is by approaching your learning curve with extreme humility (+ long hours). I made a series of embarrassing mistakes (outlined here) and daily questioned my competence at a basic level. I still do. However, it also instilled in me a drive for constant intellectual growth, something I’ve come to depend upon. I hope this will stay a core value never to be corrupted by the ego flywheel.
As a new investor, it’s tempting to spend lots of time on noise. It delivers instant gratification in an asset class with such a long holding period. Your actual returns are not disclosed but everyone can see your follower count on Twitter. But even the most ‘powerful’ VCs won’t stay in business without eventual returns. We’re incredibly lucky to have such privileged jobs, yet must remember that everything is borrowed on the promise of outsized returns.