Investment Strategies for Finding Startups: Time, Money, and Efficiency

In the world of venture capital (VC), the process of discovering and investing in promising startups is fraught with challenges and uncertainties. This process, often referred to as startup discovery, requires significant time and resources. As a seasoned venture capitalist with experience in early-stage investing, I have witnessed firsthand the dedication required to strike the right balance between fruitless efforts and fruitful discoveries.

Understanding the Investment Landscape

Based on our analysis at Storm, a venture capital firm with approximately 600 million under management, we found that roughly one-third of our returns come from companies that were either incubated or started with support from Storm, such as MobileIron, Airespace, EchoSign, and Silego. Another third of our returns stem from qualified referrals from key industry figures, including CEOs and other existing portfolio members. The final third is attributed to investments made by other venture capital firms. This breakdown underscores the importance of network and external referrals in the early stages of venture investment.

Time and Resources Distribution

The distribution of time and resources within this investment landscape is striking. Our analysis revealed that approximately one-third of the resources are spent on discovering and nurturing startups from inception. The remaining two-thirds of time and resources are dedicated to maintaining existing relationships, speaking with limited partners (LPs), and conducting due diligence on current portfolio companies. This division emphasizes the critical role of ongoing management and optimization in managing a successful venture portfolio.

The True Cost of Discovery

To identify a startup that represents a good investment opportunity, substantial investments of both time and money are necessary. Based on my experience, it typically requires a minimum of 2500 hours and $2500 for every startup you ultimately decide to invest in. Impressively, the majority of this investment—around 90-95%—concerns fruitless expeditions, meetings, and scouting missions. The remaining time and resources are reserved for activities that support existing investments and maintaining relationships with Limited Partners (LPs).

Strategic Approaches to Startup Discovery

For effective startup discovery, there are several key strategies that VCs and investors should employ:

Online and In-Person Engagement: Actively participate in both online and in-person networking events, leveraging social media and industry platforms to connect with potential startups. Product Experiences and Research: Engage with new startups by using their products and conducting thorough research. This provides valuable insights into the market and the startup's operations. Networking and Referrals: Leverage your network and industry connections to identify and support promising startups. Qualified referrals can significantly enhance the chances of finding a successful investment. Financial Investment in Meetings and Scouting: Allocate a portion of your budget specifically for travel, meetings, and scouting events to ensure you can meet and interact with the right startups. Customer Service and Reputation Management: Provide support and assistance to entrepreneurs to keep a steady flow of good opportunities. This can include referrals, introductions, and maintaining a good reputation within the startup ecosystem.

Conclusion and Cautionary Note

Entrepreneurial investment is a high-stakes endeavor that requires a strategic approach to discovery. Understanding the time and resources involved is crucial for any venture capitalist or investor looking to maximize their returns. While the process may seem daunting, the rewards of successful investments can be substantial. However, it's important to remember that this is based on personal experience, and the specifics may vary depending on your circumstances.

Disclaimer: The information provided is based on personal observations and experiences. It is not intended as professional advice and should be used for informational purposes only. The author reserves the right to modify their views and conclusions over time as new information becomes available.