Most of us need all the help we can get when it comes to personal finance and investing. But who do you turn to besides high-commission brokers and the talking heads on financial news channels? One idea is to emulate a venture capitalist (VC).
Venture capital firms offer money to startup companies that may not be able to secure traditional financing through banks and other institutions. In exchange, the VC firm receives an ownership stake, usually in the form of a percentage.
Because a new company may not have the ability to produce a track record of success, the venture capitalist takes on much more considerable risk. For this reason, only the best VC firms survive in the long term.
So what lessons can the rest of us learn from VCs about personal finance and investing?
For most venture capitalists, getting to “yes” is not easy
Unlike most consumers who choose their purchases and investments based on emotion, venture capital firms base their decisions on logic. As a result, the majority of VCs only fund about one percent of all startups pitching their ideas.
For example, Doug Leone, senior partner at Sequoia Capital, a venture capital firm based in Menlo Park, California, uses four basic tenants when making a decision concerning a startup:
a) Listen intently to the idea being presented
b) Get all the details
c) Challenge everything
d) Seek out only the best opportunities
They enlist the help of great people
When a new company founder presents an idea, there is not just one person listening, but rather a whole team of experts tempered in their experiences as entrepreneurs and business professionals.
For example, a married couple may fight over who gets to take credit for a brilliant purchase decision. The people at Sequoia are more interested in working as a team to exercise discretion in the decision making process. Everyone gets to share in all of the successes, as well as the occasional failure.
VC firms learn from their mistakes
Like the rest of us, venture capitalists occasionally make bad investments, which is part of the business. However, instead of brooding over losses, or worse yet, rushing into another bad investment seeking revenge, they instead find out what went wrong and attempt to correct it.
Some VC firms have had to learn the hard way that saying no can also cost a lot of money. For example, in 2007, Sequoia had the chance to own a 10% stake in Twitter. Instead, their investors insisted on a 20-30% stake in the fledgling company. As a result, they missed a phenomenal opportunity.
The rest of us can learn something from the investors at Sequoia: Don’t get too ambitious regarding personal finance and investing. If the math is good, take the opportunity when it presents itself.
For example, it may not be wise to delay the closing on a personal residence simply to squeeze another $1,000 out of the current owner. Conversely, waiting three months for crude oil to drop another dollar when it’s at a 10-year low may not be the best idea, either.
The best VC firms offer more than just capital
In a recent interview with Bloomberg online, Peter Chernin of The Chernin Group (TCG), a venture capital firm based in Los Angeles, echoed the idea of offering more than what is normally expected.
Unlike the disgruntled employee doing just enough to keep from being fired, the people working with Mr. Chernin go out of their way to offer more to their partners than just money:
- Help with staffing
- Finding the right product interface
- Increasing content quality
- Marketing and promotion ideas
The TCG professionals believe that the quality of the work performed is of much higher importance than the quantity. By offering more than what’s expected, Mr. Chernin has positioned his company as one of the most sought after venture capital firms in today’s rapidly changing world.
