VC’s grill entrepreneurs all the time about how they will win vs. their competitors.  What’s your “secret sauce”?  How do you have an “unfair advantage”? How do you “get to first base” in light of many other competitors?

What entrepreneurs probably don’t think about is that VC’s face the exact same questions from their own investors.  Venture is a competitive market with many players selling similar “products”.  So every VC firm needs to justify how they win vs. their competition.

Reflecting on this a bit, I’ve come to realize that there are a few different strategies to winning in venture.  Some firms pursue many of these simultaneously.  Some don’t really do any of these, hence the lemming-like behavior that is sometimes observed that leads to pretty lackluster results.

Strategy #1: See Better Companies

This is the most straightforward.  VC’s talk about “proprietary deal flow” to their LP’s all the time.  Different VC partners also have an advantaged position to see better investments based on their prior relationships with entrepreneurs.  You can bet that a VC that has had success by backing or working at one company will have an advantage in backing the alumni of those companies.  See Matt Cohler at Benchmark and his investments in Facebook alumni. 

Truly “proprietary” deal flow doesn’t really exist in most cases.  Most good entrepreneurs know that they have a better chance of securing favorable terms if they get interest from multiple investors.  I do think that semi-proprietary deal flow occurs in tiers.  IE: there are certain tiers of firms that see more or less the same quality deal flow. 

Strategy #2: Win More Competitive Deals

Also pretty straightforward.  Is the VC able to win in competitive situations? Can they convince an entrepreneur to take their capital vs. another VC based on brand, personality, promise of help, better strategy fit, etc.  Personally, I have found that three things usually drive victory in competitive situations.  One is brand.  It’s very hard to turn down an offer from a top tier investor vs. an offer from an investor with a less stellar reputation.  Second is determination.  Does the investor do whatever it takes to win – introduce the company to potential customers, start recruiting for them before a deal is inked, etc?  Mike Moritz at Sequoia is famous for being amazingly determined and persistent then it comes to trying to win competitive deals.  The third is personality/chemistry.  Entrepreneurs need to believe that they get along with their investor, can trust them when the going gets tough, and can count on them to help in meaningful ways. 

Strategy #3: Say “Yes” When Others Say “No”

Or perhaps a better way to put it is: “being willing to do what others are not.”

Not surprisingly, no one markets this. But it’s actually my favorite strategy, and it’s true in more cases than one would think.  Some people think back to the big winners and think that success was obvious from the beginning, but that is almost never true. LinkedIn looks like a sure thing in retrospect, but more than 10 investors said “no” before Sequoia ended up leading their series A (to be fair, they did have multiple offers as well).  

Of course, every early stage company has their naysayers.  What’s more interesting is when an investor is willing to employ a strategy around assumptions that few others in their industry share.  That’s also “being willing to do what others are not”.  Union Square started investing heavily in the NYC consumer internet scene before it was cool to do so.  DST started investing in super late stage winners when everyone thought they were crazy, before everyone started to try to copy them.  But usually, pioneers of a new model or space end up building sustainable advantage because they are structured for the opportunity from the beginning (both in terms of fund size and personell) and enjoy the reputational benefits of being perceived as the market leader. 

Strategy #4: Adding More Value

Again, almost all VC’s will claim that they can add more value than their counterparts.  It’s very difficult to discern the differences – some investors will demonstrate deep market knowledge, some will lean on experience as CEO’s or long-time investors, some will talk about their level of hustle.  But the truth is that almost all VC’s are smart and hard working, so it’s very difficult to differentiate.  More recently, firms have tried to be programmatic about the ways they help entrepreneurs.  First Round Capital and SV Angel try to create leverage from their portfolio and community. Andreesen Horowitz hires specialists to assist portfolio companies in areas like PR and Recruiting.  I like the programmatic approach because it actually provides something for entrepreneurs to evaluate and reference. 

So, those are the most straightforward winning strategies for VC’s.  I may be missing one or two broadly, I’ll admit.  But in the true Charlie Sheen spirit of #Winning, it should be noted that another strategy is: Raise as much money as possible and milk fees.  Usually, one needs to do something remarkable to get into a position to do this, but seriously – it’s a pretty good strategy to continued wealth, especially in an industry with a very long time horizon.  Fortunately, the best investors out there do not do this – they are incredibly thoughtful, hard working, and competitive.  Most could just coast along and play golf at Pebble Beach everyday.  But they are willing to do what others are not.