An image of Michael Douglas in his Oscar-winning role as Gordon Gekko in Wall Street. He is sat in a padded, red leather chair and is holding a cigar. A glass of whiskey rests on the desk in front of him. The New York skyline is visible through the window behind him.

Wall Street: Many people associate venture capital with the character Gordon Gekko

I have a photograph on my office wall of Michael Douglas in his Oscar-winning role as Gordon Gekko that serves as a useful conversation starter. 

When people think of venture capital (VC), they sometimes picture the Hollywood blockbuster Wall Street and its dog-eat-dog world of cut-throat deals where only the strongest and meanest survive. 

According to Gekko, greed is good, feelings are weakness, and, “The most valuable commodity I know of is information.” 

In reality, there is another commodity that is far more valuable for those aiming to succeed in VC – the soft skills related to human relationships and team building. 

This is because the industry is built on long-term partnerships and networks.  

The VC process involves a long-term commitment to backing risky innovations, with no certainty that they will work out. It is not a pure transaction, so trust is paramount. 

Founders raise money and, in return, VC representatives join the board. This small, tightly-knit team has to get along when the going gets tough. 

Understanding: The real insider information 

This means VCs spend a lot of time helping to grow businesses and manage teams, making it a very people-oriented business.  

It’s all about understanding human characteristics, motivations, and behaviours in different circumstances, then applying that to build a successful company. 

This theme runs through my teaching at Warwick Business School. It is also at the heart of my new book, Building Value: The Business of Venture Capital. 

Here are six reasons why building, managing, and leveraging relationships are crucial.  

1 Securing deals 

VC is a long-term commitment and relationships built over a period of years pay off in future opportunities. Reputation and referrals are key factors in closing deals. 

A strong reputation and good relations with founders, other VCs, accelerators, and industry insiders helps investors access high-quality deals early, while encouraging serial entrepreneurs and stronger partnerships. 

However, less than three per cent of start-ups are successful in raising capital. That means VCs spend a lot of time saying no and the way they do that matters. 

It is important to leave the door ajar for revised proposals and provide positive feedback. This helps to build a reputation for being constructive, which widens the net and may generate more opportunities.

A VC’s network can provide insights into a start-up’s leadership, market potential, and risks. 

2 Team selection   

A start-up’s management team and how they perform is the biggest determinant of success. This means hiring the right people and nurturing the team carefully.  

VCs with strong relationships and networks can bring in key hires, advisors, and even potential customers, accelerating growth. 

To build the most effective teams, VCs need to be adept at reading people and what they are really saying, as well as how they are performing.  

3 Coping with adversity 

Things will always go wrong – the key is how the team responds to that. As the saying goes, “back the team, not the idea”. 

There are many great ideas out there, but putting them into action and being able to cope when things go badly wrong is what really counts.  

VCs often have to be ruthless in making decisions which are at odds with the management team’s views and could even include removing the original founder. 

Strong people management skills are required to this the right way. Key individuals who are let go will often remain shareholders and ambassadors of the business. 

4 Managing diverse leadership teams 

Every time there’s a new investment round, more people join the board, and some drop off.  

These diverse views are important, but they can create complex relationships within the board that require careful management. 

Individual members may have their own goals and strategies, but the board must act in the interest of all shareholders. This can create potential conflicts of interest. 

Learn to look beyond what people might say and understand why they are saying it. 

5 Aligning interests

Aligning the interests of everyone involved - especially when entrepreneurs and funders don't see eye-to-eye - is critical to the success of a VC-backed start-up. 

This requires compromise and all deals need to be seen to be fair. If the deal doesn’t feel fair to all involved, it could scupper developments at a later date. 

For example, if a founder is unwilling to sell at the right time due to perceived unfairness, it may be necessary to go back to the original deal for a wider management carve out. 

Good relationships with corporate partners, private equity firms, or acquirers can help start-ups exit successfully. 

VCs often hold what we call ‘preferred shares’ that ensure they get their money back first in all scenarios. This can be a challenge when trying to align the interests of founders and investors. 

As companies grow these share structures can become complex, and the notion of fairness can be compromised. Relationships are key to managing such situations.    

6 Fundraising, syndication and scaling 

Relationships with other VC funds are important. All VCs are search for the next big thing and, while it is a competitive industry, it is also collaborative. 

VCs quite often share deals with rivals so both can participate, which helps to spread risk. This is known as syndication.  

Good relations with other investors can help start-ups to scale and enable easy onboarding of different expertise (such as technical or geographical knowledge) which provides different views and experience.

For example, bringing American VCs onboard when investing in the US can accelerate growth. 

VC investors tend to be highly specialised. They often have a background in a technical field as a CEO of successful start-ups, rather than as sharp-trading financial engineers. 

This was my own experience. I started out as an academic research scientist who was fascinated by the question of how to turn scientific advances into a business, before completing an MBA and spending 20 successful years working in VC, specialising in biotechnology and life science start-ups. 

It is also reflected in our student intake. Those enrolling on the undergraduate Venture Capital module come from a variety of disciplines including computer science, law, physics, engineering, and biotechnology, as well as from economics and business. 

By channeling my experience of backing early-stage companies, I aim to provide students with a greater degree of practical application and industry insight. 

Once they complete the module, they invariably view that photograph of Gordon Gekko in my office in a very different light. 

They realise that VC is not all about science, balance sheets, and information. It is about people and the soft skills required to build companies around really interesting innovations. Understanding that can be priceless.

Further reading:

Why are ambitious female founders penalised by investors?

Growing pains: How to help small businesses scale

The authentic founder: How to stay true to your values

Why have German car makers lost their competitive edge?

 

Simon Barnes is Professor of Practice. He teaches Entrepreneurship and New Venture Creation, Entrepreneurial Finance, Behavioural Finance: Psychology and Financial Decisions, and Entrepreneurial Finance - San Francisco on the Full-time MBA, Executive MBA, Executive MBA (London), Global Online MBA, Global Online MBA (London), and Accelerator MBA (London).

He also teaches across on our Master's portfolio, Undergraduate programmes, and Joint Degrees.

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