The Power of Lean Teams in Venture Capital
3 reasons why it is crucial to keep your VC team dry.
I’ve always been a big fan of the DRY—Don’t Repeat Yourself—principle in software development. It makes your code maintainable, readable, and less prone to errors. In a sentence, it’s a good and brilliant way to program a computer. In software development, it is also well known that small teams perform much better than large ones. In fact, it is definitely more efficient to have five ten-person teams than fifty people in one team.
In a way, a venture capital team is similar to a software development team. There’s no space for C players; you need fewer A people. Everyone must be essential to achieve the firm’s goal: investing and nurturing companies that can be capital efficient and scale the market.
On the other hand, the VC business is the exact opposite of the consulting business. In the consulting business, you aim to charge the customers with lots of people, billing by the hour. Still, because great and senior consultants are rare, every team has a few experienced members and many junior guys. Those younger consultants are mostly trained on the job and are those who generate real profit for the consulting firm.
In the VC business, the team must be as small as possible. People should be frugal and happy to take care of every aspect of the firm—like in startups. There are many reasons behind this dry organizational structure, and in the following part of this short article, I’ll try to explain the most relevant ones.
#1 Velocity
In venture capital, good deals move fast, so an effort must be made to adopt efficient processes and do your best to cut every unnecessary step. Losing the chance to invest in a promising company is the most common regret you end up having as a Partner, and in the majority of cases, that depends on how much time your company needs to get the green light on a founding team.
For example, we are a two-GP structure for our pre-seed investment fund. We take all the founders meeting together, so there’s no need to align each other. We share due diligence notes and use an AI notetaker to complete our comments. We have an efficient filing system, so all information and conversations with founders are achieved without burdening us. We don’t need internal meetings to change a process when things can be improved; we do it and share the information with the rest of the team. We minimize responsibilities overlap, except for meeting startups. Every non-core process is outsourced.
The more people work for you, the more time you need to manage them. The more time it takes to coordinate the team, the less time remains to do your job—which is to find hidden gems and support those already in your portfolio. Hence, everyone on the team must be worth the time you steal to your core business.
As a side note, I must say that these days, not every good deal moves as fast as it should, which is another opportunity for investors that keep moving quickly. The lack of appetite at any investment stage imposes a much heavier job on the founders when it comes time to raise the capital to run or expand their business. Closing even just $1M in funding requires months of hard work and tens of NO.
#2 You Can't Delegate Your Job
As a Partner in a VC firm, your first job is to find and invest in promising companies. The more you delegate the inbound deal flow screening, the more you lose contact with the market and entrepreneurs. Entrepreneurs are our customers and must be our priority; if Partners don’t like to review hundreds of pitch decks every month and talk to thousands of entrepreneurs every year, they may consider a different career. This is one of the leading things that we should be passionate about.
Each email I receive is a potential opportunity as it is written by an entrepreneur who has taken a leap of faith by leaving a secure job to establish their own business. As I said in previous articles, every person who’s brave enough to launch a startup deserves at least a few minutes of my time.
This is one of the main reasons I can't see how you can scale a venture capital team pyramid too much. The hiring process for the core business should always be horizontal, adding a new Partner when the analysis of new deals and the number of portfolio companies increase. That doesn't mean you don’t hire Associates or Principals, but their jobs should be more centered around helping during the due diligence once you find a founding team you want to analyze quickly. Or, even better, help seed more inbound deals and improve quality. In this case, publishing great content is crucial.
#3 Eat Your Own Dog Food
One of the main foundational principles when investing in a startup is choosing founders who can be capital-efficient and frugal. The less capital they raise, the less dilution everyone has at the journey's end. Whether they close a pre-seed or a Series G round doesn't matter.
Every dollar counts! Startups keep doing experiments, and sometimes, some of them don’t work as expected, and that’s OK. You learn from your mistakes and redirect your efforts towards a new direction. Building a successful, highly scalable company is never a matter of execution; it’s more about exploring unusual ways to make things and oftentimes making a U-turn if that does not make a significant impact on the business.
As an investor, you should adopt the same approach to your company. If venture capitalists want to remain connected to the customer base, they should never assume to become wealthy from the management fee. At the end of the day, as a new fund manager, you end up putting more money into the business than you earn from your salary, but things change over time, and in a few years, if you are good, you will pay you an honest paycheck. Your real gain will come later when the fund returns capital to your investors and the carried interest to the fund’s Partners.
In a sense, a VC firm should stay in a permanent startup-like stage. That’s especially true if you invest very early in the entrepreneurial journey. Hire when you are forced to do it, and when you have to, choose only to add A people to the team.
Venture capitalists should always be, first of all, entrepreneurs.
