What you need to unlearn to succeed in venture capital

Nicolas Sauvage of TDK Ventures writes that VCs must unlearn good habits that make for a steady trajectory to the top of the corporate ladder. They are no longer applicable.

If you want to become a venture capitalist, the skills and abilities that propelled your success in your corporate career will be a liability. This needs to be reckoned with whether you pursue a career in financial venture capital or corporate VC.

The bottom line is that VCs and corporations exist in different realities and play by different rules. Corporations generate profits that are as predictable and probable as possible. VCs seek out that one investment that still seems impossible to almost everyone but will one day impact society at a magnitude few anticipated.

You must understand these differences and how they inform prevailing mindsets. Then, you must unlearn the good habits that kept you on a steady trajectory to the top of the corporate ladder. They are no longer applicable. In fact, they’re a problem.

Distribution law vs power law

The most important difference between corporate and VC is how they invest. Corporations invest based on distribution law, while VCs are ruled by power law.

VC Venture Guest Column
Nicolas Sauvage, TDK Ventures

Corporations invest their limited resources, principally capabilities of their employees and capital. A good management team, especially at a public company, is one that allocates resources in a way that makes returns higher and more predictable. And a good investment strategy is one that dictates choosing a project to invest in because it offers good enough profitability at high predictability instead of high profitability potential at low predictability.

That appetite for high predictability/probability of success is a filter you’re likely bringing from your corporate career, where predictability is one of the main determinants of rewards and punishments. As you prepare for a career in VC, this is something you must unlearn.

The world of VCs, one of high risk and high reward, is ruled by power law. Power law dictates that the overwhelming majority of investments will not deliver good returns, but that very few of them will generate phenomenal returns.

Under power law, the distribution of returns is heavily skewed, revolving around the disproportionate valuation increase returned by a very small percentage of total investments. Exceptional financial performance is delivered by very few exceptional investments, and in many cases just one.

Develop a contrarian POV

With investments that perform exceptionally being such a rare commodity, your job as a venture capitalist is to find them before anyone else. Corporations may not be able to afford to invest in a vision nobody yet believes in, but for a VC to be good, it cannot afford to invest in the obvious choice.

You need to learn how to look for start-ups that have few, if any, investors and seek opportunities to invest in an entrepreneurial vision that hasn’t yet become obvious. As I mentioned, success in the world of VC is driven by being able to discern the opposite of obvious, and to build a contrarian view of the future based on unique insights.

The logic behind this is simple: if lots of people believed in the vision that inspired the founders to launch the start-up under consideration there would already have been plenty of investors. Once there are large numbers of investors, the valuation increases, the investment returns diminish accordingly, and we’re back to the distribution law that governs corporate investing and prioritizes probability.

Goodbye to consensus

I encourage you to unlearn the habit of making decisions based on consensus. Consensus is the enemy of contrarian. Consensus is what most people want.

I’ll use myself as an example. In most CVCs, the president has the power to veto investment proposals before they reach the investment committee. That makes sense intuitively. But in designing TDK Ventures, what became obvious to me was the importance of investing in the non-obvious.

Rather than having the right to veto, I insist that our investment directors are passionate about the topic, that they’ve researched it extensively during their due diligence, and that they bring conviction to their belief that we should make the investment.

If those three conditions have been met, there’s no need for a veto. And because the investors at TDK Ventures were hired for their ability to articulate a vision for a future most people don’t yet see, there’s no need for consensus either.

Nicolas Sauvage is president of TDK Ventures.