by Daniel Broyles
“It’s a can’t-miss deal; if you invest in this company, you’re gonna make A Lot Of Money,” he animatedly told me. As I sat across from the Venture Capitalist broker, I couldn’t help but feel the excitement in his words. It may have been a cold, autumn day on Wall St., but the positive energy warmed the room.
A Lesson Learned
Six years later, that “can’t-miss deal” is my biggest tax write-off. While a great financial loss, it proved to be an even greater experiential gain. Far removed from animated pitches of “VC” investment bankers and brokers, I’ve learned that Wall St.’s commission culture often meshes poorly with Palo Alto’s long-term growth mentality. As true as the adage “where there’s smoke, there’s fire” remains, so, does the reality that where there’s money, there’s Wall Street. There’s a lot of money in successful ventures; over $60B was raised in 2015 alone. Such massive flows of capital have produced innumerable “can’t miss” pitches garnering many ill-fated investments. In 2010, I compromised my personal position with a lack of knowledge and experience, and it cost me. Moreover, the broker’s lack of knowledge of and experience in Venture Capital compromised his ability to effectively give investment advice. It’s a problem with a simple solution, but it’s a problem that has persisted.
Since that poor investment decision, I have spent a great deal of time working in and learning from the VC industry. One of the first VC firms was actually established in Palo Alto in 1959: Draper, Gaither & Anderson. The rest, as they say, is history: a nearly 60-year history that offers a wealth of experience and a dearth of excuses to industry professionals. It is a history with which all self-respecting VCs should make themselves well aware, because they have a responsibility to their investors. That responsibility is to ensure that they seek and leverage all the knowledge and experience possible to bolster their due-diligence process. Many years ago, it was the inability to perform such due diligence that cost me.
A Lesson Lived
In order to perform proper due-diligence, it is imperative to understand an industry and its nuances. It is very easy to become excited by the prospect of a large commission today, but VC is about growing businesses over years and years. VC investors are in it for the long haul, so responsible VC brokers should not be shortsighted. Far too often, the focus is on making deals and not on making GOOD deals for investors. Consequently, investors should always perform their own due diligence on deals and those who pitch them. If I were as well equipped in my early years as I am today, things would have turned out very differently. Ultimately, resources were available back then that would have allowed me to make a much better-informed decision.
My due diligence process today is, in a word, exhaustive. Startups will be ever subject to risk, but these risks need not be foolish. After all, whether it be an investor or me, someone is relying upon a concerted effort and a thorough analysis of an investment. Evaluating intellectual property portfolios, management teams, competitive positioning, market size, or a myriad of other elements create opportunities to mitigate the aforementioned risks and produce better portfolios. In the end, investors should prepare themselves to ask every question and to know every answer that gives clarification.
When I chose poorly six years ago, I had two options. The first option had a very compelling broker, and the second option had all the elements of the types of companies I look for today. The great divide was a simple matter of not knowing the industry and simply trusting someone to know it for me. If you ever think it too burdensome to bridge that gap, just know that my second option was Tesla Motors.