Chips, Salsa and Your First Move Into VC

What is your very first step in allocating your capital into start-ups or early-stage companies? 

It rained all day during a recent client trip to Austin, Texas. After a long morning of travel, I worked my way through a jam-packed schedule. As my road-weariness set in, I begrudgingly looked forward to my final meeting. But, as luck should have it, that final meeting turned into a fated one, as I sat with a twenty-something who managed their family office's large portfolio of venture capital in the booth of a Mexican restaurant.

For the next two hours, my new friend and I wore out the shoes of our waiter whose endless bowls of chips and salsa fueled our conversation about the right way to do venture capital (a term interchangeable with start-up or early stage investing). The conversation's biggest takeaway: if you can, make direct investments (ownership) vs. pooling investments (funds)... and think strategically about the right approach.

i3 has been advising families since 2007, with our core services grounded in family governance, asset management, reporting and/ or underwriting/ due diligence—and over the course of the last 13 years, we’ve done the same for hundreds (if not thousands) of folks/ individuals who are seeking venture capital opportunities.  As of 2021, i3 advises on or manages more than $500,000,000 of commercial real estate for families and more than $50,000,000 of private investment ranging from start-up, early stage and/ or growth companies.         

While venture capital firms are historically the first stop for those who want to invest in venture capital, new venture capital investors (e.g. family offices and high net worth families) are the future of start-up and early stage companies. So, if you’re anything like my twenty-something friend (overloaded on chips and salsa), what is your very first step in allocating your capital into start-ups or early stage companies? Engage an experienced securities attorney in your area. They’ll inform you of your state’s Blue-Sky laws and what it means to be an Accredited Investor.  Once you know the ground rules, you can begin your foray into venture capital.  

When investing in venture capital companies, your best deal is only as good as the best deal you have access to. To succeed as a venture capital investor, you must capitalize on your existing network, share an existing network with someone else, or construct a new network of professionals who are involved with start-up or early stage companies seeking capital. Your success stems from a good pipeline of opportunities. Once professionals know that you are in the market, your Inbox will pile high with new investment opportunities.  

While the quality of your deal is contingent on your network and your access, you need to build a team capable of underwriting, due diligencing, executing and managing the investment from origination through disposition.  Because of the nature of these investments—no cash flow, high risk and long-term horizons for return of capital—you’ll want to run a low-cost model. This means: keep your overhead low, and adopt the philosophy of “pinching every penny” or “bootstrapping”.

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