Venture capital (VC) has long been at the forefront of fueling groundbreaking innovations and economic growth. However, amid increasing pressure from Limited Partners (LPs) to mitigate risk in their investments, the VC landscape has seen an influx of individuals wired to identify risk and follow established patterns. Yet, a relentless pursuit of risk mitigation presents a significant challenge to the VC sector - it often hampers the ability to accurately identify unicorn-capable founders, ultimately resulting in missed opportunities and mediocre outcomes. In this column, I argue that the obsession with risk mitigation in VC is not merely incompatible with the role but also a root cause of missed investments.
First and foremost, the VC industry demands adaptability, vision, and audacity when assessing potential investments. As opposed to the aversion to ambiguity and preference for predictability that stems from a risk-mitigation mindset, innovation thrives on uncertainty and transformative ideas - qualities that are fundamentally at odds with a risk-averse approach. In order to effectively identify and nurture game-changing startups, the VC community must broaden its focus and embrace a more open perspective.
To accurately recognize unicorn-capable founders, it is essential to adopt a diverse skillset within the VC community. Traditional finance backgrounds alone might not provide VCs with the essential skills to evaluate unconventional talent and pioneering concepts. By incorporating individuals from a range of domains, backgrounds, and expertise, VC firms augment their opportunity analysis and tap into a more nuanced understanding of the investment landscape.
Moreover, the importance of emotional intelligence (EQ) as a crucial skill within the VC sector cannot be overstated. Conventional banking mindsets typically prioritize rules, hierarchies, and predictability. However, unicorn-capable founders often disrupt such conventions and defy established patterns. As highlighted during the WiSTEM event, founders whose vision and instincts don’t conform to the conventional VC checklist might be overlooked due to a narrow focus on maintaining predictability. On the other hand, recognizing a founder’s genuine potential requires a discerning EQ.
Moreover, the emphasis on university brands as a proxy for success is a flawed notion. Entrepreneurs such as Steve Jobs dropped out of school before transforming industries precisely because they possessed superior problem-solving abilities beyond that of conventional education. The venture ecosystem may limit its talent pool by relying too heavily on graduates from elite universities. Instead, actively seeking out unconventional talent and reevaluating the necessity of a traditional education background can broaden the scope of identifying promising opportunities.
Last but not least, VCs must be open to adaptability, change, and the inherent unpredictability of the entrepreneurial journey. As pioneers in the economic landscape, VCs play a vital role in fostering innovation, disruption, and calculated risks. By adopting a more flexible attitude, focusing on potential instead of rigid patterns, and viewing the ever-evolving venture ecosystem as an opportunity, VCs can cultivate a more thriving ecosystem where unconventional ideas and diverse perspectives can flourish.
The persisting focus on risk mitigation within the VC sector hampers its ability to identify and foster unicorn-capable founders. By embracing a more adaptive outlook, cultivating a diverse skillset, recognizing emotional intelligence, reconsidering the importance of a traditional education, and embracing unpredictability and change, the VC community can evolve from merely mitigating risk to effectively capitalizing on opportunities and creating lasting impact. Ultimately, generating impressive returns for LPs lies not in upholding rules and conforming to convention but in championing the trailblazing visionaries who redefine industries and change the world.