The rapid technology market is raising the demands on tech investors. We have been thinking about what makes a great growth capital investor today, and believe that there are 5 “must-have” success factors to thrive as a modern investment company operating locally in a global technology context.
Beside the obvious, that a successful investment company must have a solid team of people making great investment decisions, what does a firm need to posses in its organisation and culture? We believe there are at least five must-have features of a successful technology investment firm in today’s technology market environment.
1 – Technology Focus and Expertise
Whatever you invest in will require sector expertise, or put another way; you need to invest in what you understand. If you are a technology investor, it follows that you need to understand technology. However, previously it was often enough to understand the company, its technology/product and its market. Now, with a rapidly dynamic environment, an investor must understand how tech will impact both business and all of society, in the short and long run, and whether a particular company will have any business at all in the coming years.
An example of an investment company with an articulated focus is Silver Lake, a private equity firm that from the start focused on technology companies, when most of its peer buyout funds were generalists.
2 – Growth Experience
Unless you have started and built a company or managed a company operationally through a sustained growth phase, it is hard to fully appreciate the challenges to grow a business. Experience from growing companies, entrepreneurship and the various challenges of building businesses is invaluable. And it is useful to have first-hand experience from both successes and failures. An investor who has been in the trenches building one or several growth companies, through all the pains and the gains, will have a distinct advantage over those who have not.
An investment firm building on entrepreneurship and experience from scaling (and failing) products globally is Atomico, started by Niklas Zennström, the co-founder behind Skype, Kazaa and Joost.
3 – Both Sides of the Table
Many successful companies combine the efforts of entrepreneurs and investors. In the best of worlds, this is a relationship that can create magic, but it requires the perspective from “both sides of the table”, i.e. being able to combine the views of both founders and capitalists. In practise this means that entrepreneurs benefit from understanding the workings of the capital market (which many do after a couple fundraising rounds), and even more importantly, that investors can see things from the entrepreneur’s view. This is usually easier if the investor has been a founder and company-builder herself.
VC firm Upfront Ventures (Los Angeles) represents this perspective. Upfront was started by entrepreneur turned venture capitalist Mark Suster, who is actually also running a blog called Both sides of the table.
4 – Global and Local Networks
Technology markets and industries are truly global, but they are also very local. The most telling sign of the local technology market are the so-called tech hot spots around the world. The most famous tech cluster, and by far the most powerful, is Silicon Valley. But today you can also count London, Tel Aviv, Shanghai, Mumbai, Barcelona, Berlin and the the Nordic clusters Stockholm, Helsinki, Copenhagen and a few other places around the globe. A key success factor is having a strong local presence in these hot-spots, based on your own location, combined with the ability to reach out to other international hubs. Much of the activity in the tech world is going on between these local tech cities, forming global networks between hubs, and more importantly, between people in these hubs.
When Ben Horowitz and Marc Andreessen started the VC firm bearing their names, one innovation was to aggregate the partners personal, industrial networks in the firm for the benefit of all their portfolio companies.
5 – Differentiated Value-creation
Today, there is intense competition for investing in the best companies. The savvy technology investor would not, however, engage in escalating price negotiations and pay up just to get a piece of a hot company. Remember legendary investor Warren Buffet’s approach to enter the room when everybody’s leaving. It’s usually not a success factor to follow the crowd, but more importantly to see value where others are missing the whole picture. This can mean to sort out difficult situations, understand a company’s long term technology opportunity or believe in how the investor’s value-add model can create enhanced returns in a different way.
Swedish VC Creandum made an thorough analysis of the global bitcoin market, enabling them to understand the opportunities (at a time when many still doubted), identifying the company KnCMiner and helping them draft a business plan before investing. That’s a differentiated and systematic approach to value-creation.
To summarise, a dynamic technology understanding, experience from building growth companies, the ability to combine both founders and investors perspective and leverage strong networks are all benefits for a portfolio company that has decided to take capital from an investor and bring its people onboard. If the tech investor in addition can see value where few other can see it, it’s sure to also be a good deal for both the investor’s investors and the entrepreneurs.