MBA students are embarking into venture capital at a rapidly increasing rate. To meet the growing demand for knowledge in this field, the faculty at Columbia Business School has developed an expanded curriculum designed to prepare students for the challenges they will face.
We recently spoke with Professor Angela W. Lee ’07, faculty director at the Eugene M. Lang Entrepreneurship Center, founder of 37 Angels, and venture partner at Fresco Capital, about the nuances of how to work with limited partners (LPs) as a venture capitalist. She also offers advice to future fund managers on what the main goal of any venture capitalist should be and discusses how the business sector has changed over time.
CBS: What do LPs look for in fund managers?
Angela W. Lee: First thing is the track record. Track records can be defined in lots of different ways. One is certainly cash-on-cash multiple; another is internal rate of return. Another can be how much funding did the companies you invested in go on to raise later. Another can be how many exits you had. Another can be the number of jobs created. There are lots of different ways to quantify the track record of your career.
The second thing is an investment thesis that matches what the LPs are looking to invest in. So, if they really want to invest in renewable energy and you're investing in oil and gas, that's not going to be a good match.
Another is team dynamics and, within that, team turnover. For example, a lot of LPs care about tenure. That is important to analyze because VC funds last for 10 years. LPs want to know that the people they give money to are the people who are going to be investing money over the life of that fund. Being able to demonstrate good investor tenure at your firm is really important.
Finally, remember that venture capitalists have three jobs: We source great deals, we select the best ones to invest in, and then we support our companies through exit. You have to have an edge in each of those areas. Why do you have access to better deals than everyone else does? Why are you more uniquely able to select the best ones to invest in? And how can you support them?
CBS: Has your LP investment strategy changed in this market?
Lee: We've seen a very tumultuous market for the last couple of years. But I find that LPs want transparency. And sometimes when there's negative news, people tend to clam up. And I think that's the wrong thing to do. The biggest change that I'm seeing around LP management is increased transparency, which is not the same as increased involvement. Increased involvement is, “I'm gonna let you sit in on the investment committee meetings.”
CBS: Is there anything in this particular area that you feel should be touched on?
Lee: Traditionally, venture capital is, “I gave you money and now I own a percentage of your company.” But now there's venture debt. There's revenue-based financing, which is where you get a percentage of revenue. There are tons of funds where you invest in a multitude of venture capital funds. There's secondary investing. It's a really exciting time to be in venture capital because there are so many ways to get involved.
Wayne Gretzky has this great quote, which is, “I don't look at where the puck is. I look at where the puck is going.” I think a lot is going to change for venture capital in the next decade. And guess what? That's how long venture capital funds last. You have to think, “What am I uniquely suited to do as a fund manager, and what is my unique take on the market?”