Learning VC the Hard Way - VCIC Part I

I have a very close friend called Ashish Chordia, who left Wharton midway to join Wharton-west, and be near Silicon Valley. We both attacked a few competitions last year and won them, one of them being the Venture Capital Investment Competition at Wharton.
Now Ashish has significant entrepreneurial instincts and is destined to be one for better or worse. I really wanted to give VCIC my best shot given my interest in Venture Capital and roped Ashish in. This brings me to the rule no.1 of building teams, always work with people you like to work with. Complementary skills are important but still secondary. In fact, Ashish and me have very similar skills and mindsets. So at this point, I set about thinking about how to build up this team. We added Siddharth Sudhir to the team. Sid is a financial wiz who churns out models by the minute and practically runs a hedge fund out east. Then we got Preet Gona, who is a biotech guy with some Venture Capital experience. And finally, we rounded it off by adding Christine Chan, who has experience as a M&A analyst for Lazard.
So all in all, we were five first years with no pretensions of being able to survive this competition.

Ashish - General Tech (Software)
Christine - M&A
Preet- Biotech
Punit - General Tech (Hardware)
Sid - Hedge fund

All in all, a good solid Venture Capital firm:)
Now, the VCIC at Wharton is structured as a 24 hour contest. And this is how it all panned out:

Friday 5pm - Pick up Business Plans
Sid went and picked up the five business plans. Funnily, for a 24 hour contest, I was not really showing much urgency. I remember having gone to a dinner with an alumni and then ambling back toward's Sid home around 10pm in the night, only to see all the rest four sitting around in various corners reading various business plans. And so it started...

Friday midnight - Analyze the Business Plans
We made a decision pretty quickly to eliminate 3 business plans and pick 2 to concentrate on. In VCIC, one is given a particular fund profile with a particular level of fund divestment along with a time frame. This means that our investment decisions have to be colored with the kind of urgency we have in terms of where we are in the lifecycle of the fund, and how much money we have to still invest.
All of us picked up one business plan based on our core competencies and decided to be the champion for those deals. First, we had to convince ourselves that we liked the plan, and if we did, then we have to convince the team. This worked well because we were hard to please, opiniated MBA students. 2 out of the 5 plans were eliminated pretty quickly by the respective "champions". This approach worked well for us in this part of the competition. However, it proved to be disastrous in the next stage when our decision to invest had to be dependent on not just viability but also the audience. Something I will explain in detail in the next post.

Saturday 3 to 5am - Build basic building blocks for the next day
Once we had eliminated the 3 out of 5 business plans, we divided up into teams. A team of two was responsible for building the basic model to be used to value the companies. The rest started analyzing all the business plans and creating a list of questions to ask the entrepreneurs. Soon, we have a list of about 30 questions or so for each business plan irrespective of whether our guts told us we should invest or not.
In parallel, we built up the model based on our top investment choice and set up the cap tables, ensured that the model was in synch with the pro-forma that we have created based on the financials that the entrepreneur had given us. In addition, we set up sensitivity analyses, created best-case, fair-way and worst case scenarios. All in all, set up stuff so as to minimize our work the next day.
Now armed with the questions and models, we crashed with the alarm set to wake us up in 2-3 hours.

Saturday 8am - Entrepreneurs Presentations
This part of the contest was relatively laidback. We had to sit for about 2 hours listening to all the five entrepreneurs pitch their business plan to us. For most part, this served as sanity check for us. We confirmed and questioned our assumptions on the plan. We also had the champion of each business plan listen very carefully to their corresponding pitch while the rest made notes and cross-checked the diligence questions that we had created the last nite. This session was immensely important because it gave us a sense of how well we had understood the business from the plan that the entrepreneur had given us.

Saturday 10am - Diligence Sessions
This was intense. We have 15 min sessions with each entrepreneur. We had tons of questions to go through and in each session, we had a real Venture Capitalist judge sitting in, taking notes on how well we were performing. This part was incredibly stressful because we had far too many questions, the entrepreneur wanted time to properly explain his/her plan but we just had to get through our questions. Here we stretched the limits of politeness and tried to be as brisk as possible. We hit upon a plan to tackle this. The Champion would start the questioning, then each team member would chime in with their questions, one person in the team (usually the champion of the previous diligence session) was the time keeper and would ensure we stayed on track.
With this plan, off we went. We started and quickly realized that we were incredibly aggressive and bordering on rude. We didnt mean to be this way, but we had so much diligence questions to take care off.
On the positive side, we came off as incredibly prepared and organized. On the negative side, we came off as very rude, aggressive professionals who bordered on being snobbish. This would be a major part of our feedback at the end of the session.

Saturday noon - Lunch and Investment thesis work
From noon - 3pm, we had three hours to come up with a valuation for the deals we wanted to invest in, a investment thesis, a term sheet and a power point presentation. We had to submit this to the judges at 3pm and then present as a team to the venture capitalist judges as if they were the investment committee.
This part of the afternoon was incredibly smooth. We broke off into teams. One team worked on the valuation and one team worked on the presentation. Here is where our composition of the team helped a lot. It was obvious very quickly to all of us, that we all were very good in terms of working together. A few of us were very good at creating effective presentations and analyzing the arguments for and against a business. Two of us were very good with numbers and so the engineer and hedge fund guy were building the term sheet and valuation model. One of us (yours truly) was good at nothing, so he spent time coordinating between everyone else. I would sit with the presentation team and ensure that we were in synch with what the valuation team was thinking. Then I would spend some time with the valuation guys trying to ensure our term sheet made sense. So being the jack of all trades helped. I actually worked in this role in the later stages too and our respective competencies really made for a great team.

Saturday 3pm - Presentations
Every team had to make a 15 min presentation and then a 10 min Q&A session. The presentation went very smoothly because we did not worry too much about the form as much as the content. Our presentation was simple but effective, and we used colors to signify many of the factors that we judged plans against. All in all, our presentation was probably what clinched things. All of us spoke, in tandem and in a way that it was very professional and effective.
The Q&A session bordered on chaos and panic. We were mere first years with not that much knowledge. The judges were seasoned VCs and we were asked some very difficult questions. Somehow, we ended up answering many. There was one hilarious confusion between C-corp and S-Corp to which one of us retorted, "Yes, our lawyer will figure it out. We do not think that mistake is a big deal!" I do not know how we survived that one. But overall we were fine.

Saturday 5pm - We Won
In general, by this time we were incredibly exhausted having barely slept for 24 hours and having gone through one of the most intense experiences at Wharton. Little did we know that once we won, a more intense experience awaited us. We sincerely believed we learnt a lot and that was prize enough.
Ashish and me had won the Wharton tech competition a couple of days ago, and we both believed that our luck had run its course. In fact, when they announced the 3rd prize, I was thinking, "Man, we didn't even come third. This is the pits!". Finally, when they announced the winners (and it was us), you should have seen our faces. We did not know what hit us.

This was probably the first time as a team we believed that we could do this. We had no clue that we were even reasonably good let alone imagine winning. But now, we felt we should give this us best shot. This changed the dynamic of the team dramatically (for the better) and we started preparing earnestly for the regionals. But that is a story for the next post.

Why did I write down this story?
Because I think there are important lessons to be learnt here.
1. It is very important to build a team of people who like each other
2. A good VC team is a team of complementary skills
3. Do not ever disrespect the entrepreneur (We did a bit when we rushed them and we learnt our lesson the hard way)
4. Plan, plan and plan in advance. Our team was effective because we were so good at breaking tasks and working in parallel
5. It does not hurt to take the lead and give away leadership of various chunks of the work to various team members.
We had one person who would quickly break off things and hand it over to various sub-teams. It worked because everyone was so focused on doing well, no one cared if someone became the de-facto team lead.

Its important to learn to lead with respect and care. That probably answers a very rudimentary question in team dynamics.
Q: How does one lead a team of peers in complex situations?
A: Very Carefully

Finally, we were an awesome team. And we became great friends. Those days are remembered fondly everytime we see each other. Everyone had competencies beyond what their resume indicated- Ashish had pure guts, Christine for her amazing organizational ability, Sid for his financial warren-buffetesque brain, Preet for pure confidence in answering any question thrown at him (even if we had no clue what the answer could be!) and me, me for being amazing at nothing yet reasonably good at everything. Wait for the next stage. I will probably write about it after a few other posts.