The US market is the place to be if you want to make it big in the VC world, as Marvin Liao declared during the CEE VC Summit, an invitation-only conference for investors organized by Vestbee. He is an investor with over 25 years of experience, a self-described Forrest Gump of Silicon Valley who started his career as a tech executive, building up Yahoo. Later on, he moved on to board seats and angel investing, before starting the San Francisco office of 500 startups and accumulating even more experience in the VC world. Currently, amongst other occupations, he runs a rolling pre-seed fund Diaspora. As his extensive experience shows, some key factors influence how successful emergent VCs will become, and most of these things cannot be learned from articles and case studies.
Here we share the most crucial of Marvin’s insights for emerging VC investors, looking to go global and reap outstanding returns.
You need to understand the market dynamics
Investment cycles in the US are much more rapid
Understanding and adapting to changing market conditions is crucial for long-term success in venture capital, especially for fund managers targeting markets such as the US. There, everything happens much faster than in the rest of the world, especially in terms of investment cycles.
The economic downturn in the US started in the first quarter of 2022, bringing with it significant changes for investments, which also varied between seed and growth stages. For example, the seed funding slowdown occurred roughly two or three quarters ago, but it has since picked up considerably. It is the growth funding that still faces major challenges, also exemplified by a rapid decrease in exits.
“I believe this dynamic could change depending on the outcome of the upcoming election. If Trump secures victory, I anticipate a resurgence in the M&A market. If Biden or another Democratic candidate wins, the pace of activity may still decelerate, just not as sharply. Anyhow, I anticipate that the liquidity market is slowly going to come back in Q4, but we'll see what the future holds,”Marvin Liao said.
Build a complementary and diverse investment team
As a VC, you have essentially three main tasks: sourcing deals, selecting investments, and supporting portfolio companies. It's crucial to have two distinct types of people on your team, dedicated to different tasks: the hunters, who excel at identifying and choosing promising companies, and the farmers, who are adept at nurturing and assisting those companies. This could include members of the portfolio management team or operating partners. As Marvin shared, the realization that comes with being in this business for a long time is as follows: these two roles require vastly different skill sets, and it's rare to find someone proficient in both.
What is more, the necessary skill sets of VCs also vary based on the stage of the investments they specialize in.
“In my experience with pre-seed and seed investments, I've come to realize that it's incredibly challenging. Honestly, I think most seed funds struggle with it as well. It requires a very specific skill set. One individual who greatly influenced my understanding of this is Mike Naples. Early in my career, he provided invaluable guidance. His approach was to bring in someone with expertise in later-stage investments, often from a banking background, to reevaluate each investment for potential follow-on funding. This method ensures a thorough assessment, making sure that follow-on investments are made wisely. It's crucial to recognize that the skill sets needed for different stages of investment vary significantly. What makes someone successful in later-stage or Series A investments might not necessarily translate to success in seed or pre-seed investing.
Personally, I believe I excel in pre-seed and seed investments. I'm adequate at Series A, but beyond that, such as in Series B or D, I often feel out of my depth. It's important to acknowledge your strengths and weaknesses. I've observed the opposite scenario as well — people who excel in later-stage investments but struggle in early-stage ventures. This is why I'm wary of individuals from a private equity background or those transitioning from private equity to angel investing or early-stage funding. Many of them don't grasp the nuances of early-stage investments, leading to complications like overly complex term sheets."
You need to understand local contexts
It’s all about finding that global maximum and learning from the best in the field
Despite criticisms, Silicon Valley remains a powerhouse in the VC game due to its network effects and concentration of talented founders and investors. It's challenging to discern high-quality opportunities without being exposed to the best, established standards, and even more to do so from afar — solely basing your idea of what excellence looks like from articles or case studies. This is particularly challenging in emerging ecosystems or for new angel investors because often, they're unaware of what they don't know.
“As a Canadian, I've encountered many individuals far more intelligent than myself, yet I've achieved greater success by placing myself in the right environment. In Silicon Valley, there's a popular belief that you should surround yourself with the best because your standards are influenced by those you spend the most time with. If you engage with highly accomplished people, you will naturally adopt higher standards.“
Community matters
Another benefit of being part of a community is the opportunity to benchmark yourself against others and learn from their experiences. Community building reduces individual workload and fosters mutual support. The network effects within communities actually strengthen over time, which makes them even more valuable. Despite claims that Silicon Valley is declining, the presence of numerous exceptional founders and investors continues to attract talent and opportunities, reinforcing its significance in the tech ecosystem.
Emerging VCs and founders need to establish ties to the US markets
What has become clear to Marvin is that companies without a US presence struggle to grow rapidly, as the proximity to customers and access to resources in US cities contribute to the success of startups.
“For example, I came across a promising company from Germany during my involvement with a German accelerator program. Despite my initial enthusiasm for the team and their oversubscribed round, I realized that investing wouldn't be viable if they couldn't relocate to the US. Despite being a developer tool with a global reach, being physically present in the US, where most of their customers are, was crucial for their growth potential. Reflecting on my 2021 portfolio, I recognized a similar mistake. While I invested in exceptionally talented founders, I failed to prioritize their ability to establish a presence in the US. This oversight proved detrimental, as even though the businesses were brilliant, they couldn't scale fast enough without a US presence.”
Go where the smart people go
“As a VC, keeping tabs on where the smartest people are going is essential. One of the things I've been closely monitoring is the trajectory of former employees of Coinbase. Are they going to another company? Are they actually going to start their own company?
You see a lot of goings-on, starting their own company. Tracking these movements serves as a valuable indicator of industry trends, akin to using Facebook's Meta platform as a tracer in the past. Keeping close tabs on industries, I've observed a considerable amount of activity in defense technology, as well as ongoing innovation in enterprise software and developer tools,a space that I find particularly intriguing.“
Urgency matters
Urgency is crucial, especially in pre-seed investments, where the margin for error is minimal. Prompt action allows for quicker correction of mistakes, essential for success in venture capital. The concept of clock speed, meaning the average pace of different activities performed in different environments, can be very useful when thinking about how fast different actions are taken up in different ecosystems.
“The clock speed really matters. I've noticed a big difference in response times when talking to founders in San Francisco compared to those in Europe. In San Francisco, it's not uncommon to receive a follow-up or requested materials within 24 hours, whereas in Europe, it can take up to a week. While this discrepancy may not seem fair, because there's such little margin for error, it really shows the importance of speed in the industry.”
Insights on VC fund strategies
Choose business models that drive returns
There are specific characteristics to look for in business models, which have the biggest possibility to drive significant returns. They are embed and network effects. Embeddedness, as seen in Salesforce or Oracle, means choosing products that, once integrated, become incredibly difficult to replace. This business model is prevalent in many B2B enterprise ventures, offering substantial stickiness when executed effectively.
“Network effects are another key aspect I look for, particularly in basic marketplaces. As someone who has been involved in ventures since the late 1990s, I've witnessed the enduring success of platforms like eBay and Craigslist, despite numerous attempts to disrupt them. The sheer volume of investment poured into disrupting Craigslist is staggering, yet it remains resilient due to its robust network effects. Creating a successful global marketplace presents distinct challenges compared to local-to-local marketplaces, which are notoriously difficult to execute.”
Think outside the box
To be successful in this business, VCs need to be able to identify opportunities before they become widely recognized. This necessitates confidence in one's investment thesis, even when met with skepticism, and being comfortable dissenting from the consensus. Many successful deals, before they became successful, were met with contention. Ultimately, the path to profitability lies in embracing unconventional ideas and having the courage to pursue them, even when they may seem unorthodox or unpopular.
Adopt a long-term perspective
Success in venture capital takes time and a long-term outlook, it often requires five to six years before a feedback loop is established. Achieving market fit is a gradual process and investors must have the patience to await market validation. As Marvin found, the typical duration for a VC fund to return has extended to around 14 years
Portfolio management and software tools
Portfolio management is one of the toughest aspects of venture capital, especially at early stages, and it requires significant time and energy. When managing a large number of portfolio companies VCs often have to deal with lots of paperwork and administrative burden. It demands a considerable amount of time and energy, and interestingly VCs are reluctant to use software solutions in these areas, although progress is slowly being made.
“It's somewhat ironic that venture capitalists seem to be lagging behind in adopting software tools compared to other industries. As the number of deals increases, so does the likelihood of encountering issues. Managing follow-ups and dealing with the extensive paperwork involved can be overwhelming.
For me, this lesson became apparent during my time at 500 startups, where we managed around 3,000 companies. Many of these companies ended up frustrated with us due to delays in signing documents and responding to their needs, which showed the significant challenges that are inherent in managing such a large number of companies. It’s very very challenging.“
