Nelson’s tips on investing in Startups

Why do Venture Capital companies invest in Startups? This is a question I addressed in a conversation I had with Nelson Chu, a managing director in an Atlanta-based VC.

Nelson has been working in Venture Capital since 1998. He focuses on information and infrastructure technologies, enterprise and Internet software, and other emerging software and hardware technologies. He has led a broad range of Kinetic investments including BroadWare (acquired by Cisco; NASDAQ: CSCO), VerticalOne (acquired by SONE; NASDAQ: SONE), FoodBuy (acquired by Compass Group; LSE: CPG.L), Cardlytics, Tower Cloud, and Kwarter.

Prior to joining Kinetic Ventures, Nelson was a management consultant with McKinsey & Company and a Development Manager with Oracle. Nelson received his BS in Electrical Engineering (summa cum laude) from Virginia Tech, his MS in Electrical Engineering from the Massachusetts Institute of Technology and his MBA with distinction from Harvard Business School.

I/ The story of Kinetic Ventures

Nelson has been working at Kinetic Ventures since 1998. The firm is a venture capital investor in communications, information and power/clean technology driven businesses. For nearly three decades Kinetic has partnered with outstanding entrepreneurs to build world class enterprises

II/ Why invest?

One of the first things that came to my mind when I met Nelson is the following question: how does Nelson decide to invest? Why does he decide to invest in one company over another one?

Nelson told me that they’re basically three things he’s looking for when he invests in a startup: management, market opportunity and technology. The customary question is: which is most important? One may think that technology is the most important, because it’s a “tangible and objective” asset and they invest in technology businesses. But, Nelson feels that management is the most important factor.

So I asked what it was in management that made it more important than technology: is there something specific about management that he’s really looking for? Is there a specific set of skills? Are there specific values that are conducive to success?

He mentioned that entrepreneurs rarely realize their initial business plan. This is because for early-stage companies (e.g., pre-revenue and sometimes even pre-product), it’s practically impossible to predict future events, future market structures, future competitive moves, future changes in technology, let alone future revenue streams. As a result, entrepreneurs need to develop not a business plan per se, but rather, a “learning plan”. And the key to learning is listening according to Nelson.

III/ Listening ensures management success which is a condition to investing in Startups

Most of the time, entrepreneurs have interesting ideas but their ideas are not meeting any specific market need. In other words, entrepreneurs are not addressing problems people have in their daily lives. Entrepreneurs tend to develop an idea and refine it over the course of several years. When they finally end up presenting it to customers, they realize that their product doesn’t address any specific problem. The best case scenario is that these entrepreneurs modify their products in order to meet a specific customer problem. But, often times, given that they have spent so much time polishing their innovation, they are reluctant to make any changes to it. This usually spells problems.

Therefore, it’s critical that entrepreneurs learn to change their ideas in order to create something that addresses a specific problem, and the bigger the problem, the better. This requires iteration and constant discussion with potential customers.  Nelson invests in companies that have not only acquired some kind of client input but also developed a real “customer first” culture.

As result, Nelson invests in startups that:

• have made the effort of talking to customers
• develop learning and listening abilities
• are in constant interaction with customers

This, according to Nelson, is the best way to succeed. Next week, I’ll talk about an investment Nelson made in an internet Startup.

Further Readings on investing in Startups:

• For a post on the psychological difficulty there is for inventors to listen to client feedback, please refer to this post
• For a description of an innovation process that maximize client purchases, please refer here
• For an interesting video of how VCs invest in Startups and why, please refer here
• For a description of startup investment trends and Y Combinator in particular, please refer to this article