Is Silicon Valley waiting for investors and is it possible to get into the investment club?

The Valley Investment Club has membership as professional investors understand that when you invest early on you need to follow the company for at least 10 years so there must be people that you can trust. This is impossible with the first investor that comes along as no one knows how they earned their money.

It is quite possible to get into the investment club of the Valley but you need to show other investors how you can be helpful to do so, since just having money is not enough for funds and startups. Today there is a sufficient amount of funds in Silicon Valley.

It is easier for companies to work with professional American investors since the rules of the game are clear and understandable. If a startuper contacts an investor from Asia or Eastern Europe, it is unclear how they will behave in the future. Large Silicon Valley funds are wary of people who came from outside the Valley due to bad experience with Chinese investors who gave money, and then interfered with the company and began to lay down the rules.

Investors often text me asking to introduce them to the founder of the fund. But I think they first need to answer one question: Why would a top partner, for example, the same Sequoia Capital, meet with you?

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Investors and startups in Silicon Valley

An investor must be a specialist in a certain area in order to have a reputation as an expert, and at the same time be educated enough to understand other areas. I like the venture capital industry because I have to learn every day. There are times when they send a business presentation on a topic that I do not understand at all, and I have to quickly learn the basics. In such situations, I am very proud of my network of professionals because I can always ask someone who is an expert in this field for help.

With a large amount of money, an investor can always find a company that needs money. However, it is often quite difficult for businessmen to realize that they can give their money for third-party management. Actually, this is what venture funds with a clear line between limited and general partners are built on. Therefore, in order to be a professional investor, it is better to invest in funds, and then evaluate the managers whom you have entrusted to choose startups.

In case you want the CEO of the company to describe their project progress in detail every day, you need to invest directly. The strength of a professional investor lies in the selection of the teams that build their own business, while the investor only helps and supports them. A situation where an investor feels they can do better than the CEO indicates great problems. In such rare cases, the investor may come to a conflict and have to remove the founder of the company.

When startups have something to show the world and are given the opportunity to contact Sequoia Capital or Andreessen Horowitz, none of them will have much interest in an investor who made money inexplicably. And as is often the case among Russian-speaking investors, the one that also throws their weight around and tells you how to work. It is important for a startup to get answers to all its questions when having a conversation with a venture capitalist.

Thus, if you start a business with a small team, you need to understand that as the project develops, different situations may arise and they may require your help.

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Why does everyone want to come to Silicon Valley?

All the best projects in the world are here, the best minds come here from all over the globe because it’s a very large market for venture capital investments. Silicon Valley attracts those who want to improve the world or solve a problem that affects a large number of people. Startups should be in the Valley to understand how things work, and investors should be in the Valley to hone their skills.

One of the biggest challenges in being a venture capitalist is saying no 90% of the time. And how good you are at it depends on how much time you’ve spent in Silicon Valley.

In turn, startups think that they have created a unique project that will change the world, and are trying to find an investor for it. But no one can predict which company or industry might take off. When Google appeared, there were already dozens of search engines that were much better done technologically. I believe this startup only took off because of the smart investors.

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External investments in Silicon Valley and their impact

If a company has already been invested in, say, in Europe, and investors outside America have brought the startup to a level where it already has metrics, customers and sales, it will still eventually come to Silicon Valley in order to move up to the next round. And the project’s further development will depend on how interesting what they do is for other investors.

It is quite rare that a company creates a revolutionary technology that is rapidly gaining popularity, like Skype and Uber. To attract the attention of investors, it is enough to have a constant number of people using your product.

Silicon Valley is interesting because it welcomes new players. An example of this is Skype whose founders did not live in America. In fact, in the early 2000s, they were doing exactly the same thing as their direct competitor VoiceIP. But it should be noted that it was not the best technology that won, but a company with competent investors. Skype broke into the market and made the right partnership with the people who helped them rebuild their business, and VoiceIP was swallowed up by a large corporation, which prevented their further development. So the takeaway is you can come to Silicon Valley and break down all the barriers.

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What about investors that are not part of a private investment club?

If you have $2M to invest, theoretically you can go to top funds. However, in practice, this is almost impossible. Remember that there are many other good venture funds that do not have their own base of limited partners and it will be easier for them to take a new investor into their fund. But in this case, it is important to understand how this fund fits into the overall picture of Silicon Valley.

I remember well the rather big crisis in 2004–2005, when American venture capital funds took money from Arab, Russian and Chinese investors. Now there is a colossal amount of money in the Valley, and the US government is making sure that foreign investors do not step out of line in technology and venture capital investments. At the moment, due to political conflicts, companies and funds are wary of money from China.

When I first started out, the only top VC fund that was respected was the Singapore Fund, that worked according to the rules of Silicon Valley, had a clear structure, and its returns were the same as any American fund. That’s actually why the fund has been inside a closed investment club for decades.

Facebook was once an absolute innovator. Those investing in it did not need a seat on the board of directors and allowed the company to make their own assessment, because there was simply no easy investment money on the market back then. Later it became clear that investors were very far-sighted: Facebook’s valuation was around $10B and local investors thought the startup was terribly overvalued. As a result, the company became what it is today.

Later, they tried to repeat the trick with entering the company under eased conditions, but no one succeeded until SoftBank Vision Fund appeared, filling the market with money that shocked local investors.

SoftBank became the top performer as it gave easy money compared to Silicon Valley funds. Nevertheless, people who had been involved in venture capital investments for a long time realized that sooner or later this would come to an end, since such a model is simply unstable. And subsequently SoftBank began to fizzle out, which did not come as a surprise to the old-timers of venture investment who knew this area had its own laws and regulations. After this, many companies became more cautious about funds that give out large amounts of easy money, and Sequoia Capital became the leader again.

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Do I need to pay people who bring deals?

I don’t pay anyone, because I have a wide circle of acquaintances who will always offer something that will interest me. A professional network can bring benefits in the form of barter. I have business friends and we help each other.

Of course, there are funds that pay for deals. However, I am focusing on top funds that do not charge money for this. After all, at some point everyone needs help and there are things that cannot be estimated with money, like connections. Of course, there are compensations, but of different levels, like earning interest on the transaction if that’s what you initially agreed on. I believe that everything happens organically. When you are an expert in a certain field, you are looking for a fund that matches your expertise.

If you want to develop in a specific industry, you need to understand the laws of building a business. Personally, I am always interested in evaluating the team behind the technology of the project, because, after all, they are the ones who build this company and will experience all the difficulties of its growth. Even in the best market conditions, something can always change and the question arises whether the company will survive or not. While large venture capital funds have marketing and PR departments, there are funds that must constantly look out for profitable deals due to having 2–3 partners.

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Are venues like AngelList going to be more active in the venture capital industry?

I think yes. If we look at Y Combinator, today it is a marketplace that provides services for international budding investors. AngelList is the platform that gives a person the opportunity to try investing and enter the investor club. And if you are interested in investments, starting with such sites is the best decision. In case you want to be an investor at an early stage, you need to look very carefully and evaluate the company.

Quite often, there are situations when new foreign investors come and tell the founder of the company that they will support them in everything straightaway, if only the startup takes their money. However, the investor needs to both build trust with their portfolio company and understand that they are not friends.

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How many funds should investors invest in?

Of course, you can invest in different ways. If you do not want to be involved in what companies do from morning to night, then just say that you want to invest your money, for example, in technology, without being involved in the startup itself. In this case, you can either simply give all the money to one fund, or distribute it among different ones.

A more competent decision would be to distribute the money among different funds, because this is the very diversification that is so important. Since when you invest in companies of the same profile, various situations can occur that may devastate the industry, for example, the coronavirus has hit travel companies very hard.

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Implications of Covid-19 for Silicon Valley

When things just started to unfold in March, there was some uncertainty. We, investors, communicated with each other and did not understand what awaits us all in the future. For the first 3 months, we looked at weak portfolio companies and wondered which ones would die and which ones would survive — after all, companies in this category need help, since they either succeed or not.

After a while, oddly enough, everything resumed its normal course. Except now investors learned to look at deals via Zoom and completely redesigned the due diligence process. Yet, it was still more difficult to do it online. And in these conditions, large funds with strong connections, have changed the line of business faster than all the others.

Interestingly, during the 2020 pandemic in Silicon Valley, the level of investment increased and the amount of money invested was higher than in 2019, as did the amount of money invested at a later stage. As for the early stage, everything began to decline here, since the due diligence process takes much longer and there are more risks in such a period.

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The future of Silicon Valley

Luckily for everyone, Zoom allows investors to check out companies literally everywhere, and there is now a real chance for startups from all regions of the world to get on the radar of top investors in Silicon Valley. And it’s great that a person can sit at home and look at transactions from different parts of the world.

However, I am concerned that the element of spontaneity is disappearing. When you are sitting in a meeting in the cafe on University Avenue, there are people around you discussing several other transactions and there is a chance of “cross-pollination”. You get to know other investors and start-ups by simply sitting at their table.

For me, Silicon Valley was strong, including this element of spontaneous surprise, and it is absolutely impossible to do this online. After all, it used to be possible to meet a top investor or CEO of a large company like Tim Cook at a grocery store by a lucky chance. Now this will not happen.