Thread by @GigiLevy

1/ Over the years we learned the hard lesson that for a startup, understanding VCs' mindsets is as important as understanding the mindsets of your customers

To start, you have to understand the key psychological drivers behind VCs' investing decisions

nfx.com/post/how-vcs-t…

2/ First, understand the economics around a VC. Partners (GPs) in the firm only make money once the fund investors (LPs) return their initial investments. After that, they usually get around 20% of the profit, usually called "carried interest"

3/ Because of this, VCs need really large exits to return the LPs' initial investments & generate profit.

For startup founders, a $100 M exit might seem like an great outcome. But for a VC, it might not even move the needle. The economics force VCs to aim for big hits.

4/ Since venture is a hit-driven business, every successful fund banks on hitting on 1 or 2 companies that will "make" the fund.

So, VCs need to hold a sufficient stake. Imagine the pain of holding only 3% of a company that could've returned the entire fund.

5/ The VC managing partner role basically boils down to 3 things:

1) screening potential investments
2) diving deeper into the better deals
3) choosing the right companies to invest in

6/ VCs can get 10s of meeting requests per day. It's never clear where the next great company will come from so they need to review all of them.

(side note: we created the Brief thecompanybrief.com so Founders understand the key info to cover in their VC pitches)

7/ Every VC has 2 key psychological drivers that guide their behavior:

1. FOMO: fear of missing out. Missing out on big deals is a VC's biggest fear.

2. FOLS: fear of looking stupid. VCs avoid investments that make LPs ask "what were you thinking?"

8/ Another nuance to understand about interfacing with VCs is that time is the VC's friend, not yours. VCs prefer to wait to make their investment decisions; the longer they wait, the more data they gather & the lower their risk is.

For VCs, time is optionality.

9/ As a startup founder, the opposite is true. You're racing against the clock, you need funding now. You want to close fast.

The only way to get investors to move at your pace is to leverage FOMO. VCs usually only move fast when other VCs are interested.

10/ There are 3 methods you can use to use the VC mindset in your favor

1. Convince the VC you're low risk
2. Prove that you have huge potential
3. Show the VC that others are interested

11/ VCs speak a different language, one that Founders must learn to be able to raise capital. Understand the psychological drivers and use them to evaluate your counterpart’s state of mind.

12/ For a full description of how VCs think and the way to use their mindset in your favor, read my full essay here:
nfx.com/post/how-vcs-t…