This video of David Teten speaking at Startup Grind NYC in 2014 contains a number of good insights into concepts both VCs and startup executives should be working through. David is a good friend of VentureOut and a partner at HOF Capital, a leading venture fund in NYC (although at the time of this video he was a Partner at ff Venture Capital).
An interesting concept he discusses is Systemic risk vs Idiosyncratic risk when evaluating early stage companies. Teten applies the concept when investing in startups, stating that the venture fund should be able to manage or aid in the Systemic risks of a particular startup, while the startup team themselves need to be able to handle the idiosyncratic risks inherent within their company.
Systemic risks: the macro-level risks associated with scaling a company
Systemic risks are macro-level risks associated with scaling a company. Good VC’s should be able to mitigate these risks to a certain extent. Teten states risks, like understanding how to build a company, making the next great hires or raising the next round of financing, are key for a VC to be able to help with. It is important for a VC to weigh this into their investment decision (namely, their ability to mitigate these kinds of risks). It is also important for a startup to weigh this into their decision when choosing which investors to work with.
From the founders perspective, the following questions should be easily answered:
- Does this VC have a track record of helping a company with their next round either by follow-on investment or a network of later stage investors they’ve worked with in the past? (Crunchbase and AngelList are your friends)
- Can they help with business functions we’ll need to scale post fundraise? For example, ff VC has entire teams dedicated to helping their portfolio with PR/Communication/Finances etc.
- Do they have a network of other founders, partners, etc that can add value to my business? VC’s like Brand Foundry and First Round have platforms to help with connections and challenges their portfolio companies are facing.
- How active is this investor with their current portfolio? Do they take board seats? For b2b startups, have they facilitated large sales or partnerships? Again, do your diligence on the VC’s existing portfolio.
Idiosyncratic risk: the micro-level risks associated with the startup being able to solve the problem it is trying to solve
Idiosyncratic risks are essentially the micro level risks associated with the startup being able to solve the problem it is trying to solve. Teten uses an example from the FF VC portfolio, InteraXon (or Muse), to illustrate this concept.
According to their Crunchbase, InteraXon is the “is the maker of brainwave-controlled computing technology and applications”. As a generalist investor, Teten doesn’t expect ff VC to completely understand the complexities and intricacies of building this product, but he needs to understand how the startup is uniquely positioned to tackle the problem at hand.
While this is an inherently more important set of risks for a VC to understand during the evaluation process, it is the startup’s job to communicate the answers to these questions effectively.
- Does the team fundamentally understand the problem they are trying to solve? Does the team have the domain expertise to tackle the challenge at hand? Going back to the previous example, is InteraXon’s team comprised of scientists/PHD’s/researchers, did the solution stem from proprietary research, etc.
- How is the team uniquely positioned to be successful compared to the competitive landscape? A startup should be able to prove how defensible their technology is, aka “the secret sauce” that makes the company more valuable than others.
Other ways for startups to mitigate risks
Beyond the symbiotic relationship startups and investors should have, there are other ways for startups to mitigate these risks. Programs like VentureOut exist to help long-term with the systemic challenges of scaling a company, especially into new markets. They also provide a foundational network of experts to help within their specific sector. Other organizations, like The Founders Organization, provide access to peer support, while sector focused incubators like NYU StartEd provide easier access to industry insiders and experts.
At the end of the day, these risks and sets of challenges and concepts are essentially mitigated by having a great team, the ability to attract and retain the best talent, and the willingness and ability to dissect and take advantage of the opportunities that exist for founding teams today.