Belief in a significant cause
The first psychological trait is that most investors think about playing a crucial role in building the economy and creating foundations for prosperity and growth. For the most part, this drives them to seek opportunities that align with that vision. It's about the more significant cause, and the positive impact new business ventures will have on society.
Consider the impact world-famous streaming service Netflix has had in South Africa,
As of 2020 Netflix has invested R2b into producing locally made content in South Africa. That’s a brand with a bigger purpose than itself, uplifting and showcasing local talent.
Venture capital investors spend a substantial amount of time screening potential investments. When striking gold, they dig deeper, diving into opportunities that shine. To find that gold means mining hundreds of proposals, perhaps every week. It's challenging not to be meticulous as any one proposal could be the next big deal.
Chasing big hits
As crafty as venture capitalists are, they cannot predict the future outcome of any one investment. While some venture capital firms focus on smaller start-ups it can be tough to generate adequate returns. So, investors aim for larger deal sizes that will produce sizeable returns for all stakeholders. They will build an investment portfolio of various options and focus on chasing the big hits.
Big hits are few and far apart. When a big hit gets missed, an investor feels it. Missing big hits is their biggest fear and can lead to profound personal regret.
Even the best of investors miss big hits, like Warren Buffet,
Warren Buffet missed out on purchasing Dallas-Fort Worth NBC station for $35m, even though he thought it was a good deal. When he addressed his shareholders in 2007 about the missed opportunity, the station was worth $800m.
Unpacking the mind of a venture capital investor can be equally as important as understanding the mindset of customers. In user experience design, the best way to understand a user's needs is by finding and empathising with their pain points. When pitching business ideas to a venture capital investor ask, what keeps them up at night and what can be answered before they ask?
Investors are partners in venture capital firms and get referred to as General Partners. They secure the money they invest in start-ups from institutional investors known as Limited Partners.
Limited partners trust the venture capitalist to make investments on their behalf. The top priority for investors is recovering the initial capital injection for the Limited Partners.
When investments secure a profit, the investor claims their share through carried interest. Carried interest is a percentage of profits and can be up to 20 per cent.
The stakes are high when you are a venture capitalist. Therefore, their equity in a business needs to balance the risk. The percentage holding a venture capitalist seeks falls within the 10 to 15 per cent range but can be higher. The higher the holding, the more attractive the returns are. They need to generate much larger exit values if they take minor equity positions. Lastly, investors prefer a safe deal at the price of a risky deal.
Time is their ally
Venture capital investors have time on their side. They will wait before making an investment decision ensuring all checks and balances are accounted for. The more they know, the lower the risk, and time provides more data gathering and better insight into an investee.
Quick progress means lower investment risk. Entrepreneurs must convince investors of low risk and know they feed from progress updates. As they witness a start-up achieving favourable milestones, their investment decision begins to gain momentum in an investee's favour.
They value people
Character, determination, and leadership are some of the traits investors look for in entrepreneurs, taking precedence over money.
An investees experience and history with their team are critical drivers in investment decision-making. These discussions make for good stories which an investor is intrigued to hear. They are inspired more by the story that led to a solution for a problem than how much money it will make. But money is necessary.
Investors will move quicker with decisions if a hot opportunity is securing term sheets. The hotter an investment opportunity seems, the more interested investors will be. They value the truth and can detect a fabricated story. If a story is a lie, investors will send investees down the river faster than they can say, 'tick-tock'.
Failure holds value
The experience that comes with hitting it big is valuable. The secret is that colossal failures are helpful too, and investors understand this.
Although investors like being liked, they are not in it for the love of being the most polite person in the room. They base their love on being transparent and trustworthy, able to deliver the hard truth. Investees must put their best foot forward, and investors, must make the hard decisions.