PS#084: A Reference Guide for a Successful Internship (Part 2)
In the last issue, we discussed building out the sourcing skill set and owning the top of the funnel.
Today, we are going to dive into the evaluation and diligence process. This is another important part of the venture capital skill stack to focus on during your internship.
Let’s get started.
Goal: learn the evaluation and diligence process for an investment opportunity.
Once we set up our sourcing efforts, it’s time to start evaluating startups and investment opportunities. Again, this is a key skill for investors.
Your goal for the internship should be to develop a process for identifying, evaluating, and diligencing the best opportunities for your fund.
As we’ve discussed previously, venture capitalists review hundreds (if not thousands) of deals over the life of a fund, only to invest in a handful (less than 1%). This means that we have to be very selective about the startups we choose to invest in and support.
To be fair, there are always new ways to think about and evaluate startups, especially as our world continues to evolve. It's a lifelong pursuit. However, there are a couple processes that are tried and true. These are the ones that I have leveraged throughout my career…
1. Collecting, organizing, and analyzing the data.
On a daily basis, a venture investor’s job is to collect, organize, and analyze information.
The goal is to gather as much data as possible on a space, synthesize it, and leverage that analysis to make the best investment decisions for our fund. While simple in concept, the process of collecting and synthesizing information is not easy. If we aren’t doing this consistently, it can be quite overwhelming to try to get up to speed.
For example, if you’re pursuing a competitive deal, you might only have a few days or weeks to make a decision. If you haven’t been collecting, organizing, and synthesizing information along the way, this can be pretty difficult.
Plus, you don’t want to be making your decision in a vacuum. You want to understand the market, competitive landscape, etc. before making a long-term investment.
This is why you’ll see so many investors building out their own databases, creating market maps, calculating market sizes, parsing competitive landscapes, etc. They are synthesizing the collected data to drive investment decisions.
Check out these resources (alongside learning on the job) to help build out this skill…
PS#049: Tracking Financings – How to Create Your Own Venture Database
PS#049: Tracking Financings – How to Create Your Own Venture Database
2. Pitching opportunities.
As an aspiring or new investor, you won’t just be convincing yourself that an opportunity is a good investment… You’ll be convincing your team and likely the investment committee.
All of that data needs to be synthesized into a concise investment pitch that convinces the senior investors at the fund that it’s worth redirecting resources to pursue this opportunity.
This is often where I see newer investors struggle. They gain conviction around a startup, but are unable to convince the partner(s) or investment committee that it’s worth pursuing. For a lot of them, they think the evaluation process is objective, but in reality it’s very subjective. Your job is to use the evaluation process to make the case for pursuing an investment opportunity (just like founders are doing with you).
It doesn’t matter if you’re at a big fund or small fund, institutional or corporate fund, early stage or late stage, they are all the same. As a junior investor, you need to be able to evaluate, synthesize, and deliver a compelling, concise investment pitch.
My recommendation is to observe the ways other investors pitch their investments at the fund. How are they positioning the companies? Are they using certain language to describe the opportunity? Do certain partners prefer certain types of companies?
Observe and learn.
I’ve written a few pieces that can help you think through pitching your investment opportunities…
3. Building a diligence plan.
This is where it gets a bit more challenging.
Most internships will give you plenty of opportunities to source and evaluate startups. But, as I’ve discussed previously, diligence requires another level of commitment. The fund will need to dedicate time and resources to a specific deal, time and resources that could be spent elsewhere.
If your internship brings you into the diligence process, awesome! Get as involved as possible. Learn from more senior investors. Focus your efforts on really understanding how these investors identify and diligence the risks involved with a deal.
Learning how to design a diligence plan (and being able to do it over and over again across different situations) will give you a big leg up in full-time recruiting processes.
If your internship is not as keen on including you in diligence processes (this happens relatively often), this will be more difficult.
As we’ve discussed in previous issues, it’s all about providing value. If you can provide in-depth analysis on the market or competitive dynamics, connections to relevant references (i.e., network relationships), or the ability to perform financial/returns analysis, you’ll have a better chance of inserting yourself into the process.
It might not be easy, but you’ll increase the odds.
If you want my full playbook, check out the course and article listed below.
