As the cofounders of venture capital firm CIV, Jeff Rosenthal and Abhijoy Mitra have overseen the development of various tech companies.
“There are not 100 outlier founders and companies every year to bet on,” Rosenthal said in an interview with Business Insider. “There are a dozen.”
CIV has invested in companies like The Nuclear Company and Verse.
For most VCs, the goal of investing in a company is to see it go public and generate a return eventually. As exit opportunities have become increasingly scarce, though, firms are raising the standards for evaluating which companies will make it long term.
After watching a number of failures and successes, these are the five key lessons the investors recommend to entrepreneurs.
1. Be ‘laser-focused’ on capital efficiency
Mitra, who has built his career investing in technology, said businesses in the industrial sector often fail because they don’t transition from equity to non-equity funding quickly enough.
“You don’t have infinite venture capital,” Mitra said. “You need to be very efficient on dollars you raise, and really focus on building a profitable product in a well-defined period.”
He said building real-world solutions and not over-relying on equity funding is crucial. Founders who build their companies with customers in mind will likely be more successful than those who build for investors, Mitra said.
“You probably need half a billion of revenue and maybe the profitability to actually go public,” Mitra said. “So as a venture investor, we think about that constantly.”
2. Build a product with a large target market
Rosenthal said that often he sees highly talented people “pick too small of a market.” Or, he said their “angle of attack” into that market doesn’t capture the scale needed to turn it into a large business. At its core, scale and impact are “mutually inclusive,” Rosenthal said.
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“The game we’re all trying to play is like, how do you really have impact in this world,” the serial entrepreneur told BI. “So, taking the world where it is, versus where you want it to be.”
Mitra said he’s seen companies build a perfect product for a market that isn’t quite ready for it too many times. While the founders and the products may be amazing, the target market has to have a real use for it.
“You gotta, like, actually build something that is audacious and transformational for a big end market, ” Mitra said, adding that that often means several billions of market cap to be accrued.
3. Choose the right partner
Rosenthal said that “breakup risk between partners” is one of the top concerns institutional investors raise with companies. He said he pays close attention to cofounders and how they interact with one another.
“Like, how do you guys know each other? How close of friends are you?” Rosenthal said.
Rosenthal, who partnered with his best friend and colleague to form CIV, said that they “wrote each other back and forth like pen pals” to make sure they were on the same page before partnering. He said they would ask each other questions about what they envisioned for their business culture, or when they planned to start and end the day.
Rosenthal also suggests talking to a potential partner’s former employees and friends to understand how the other person operates.
“It’s worth doing the extra step,” Rosenthal said. “And you don’t have to do it secretly.”
4. Talent is key
Rosenthal said that hiring the right talent is key when starting a business. If you can recruit the top talent, you have a comparative advantage that’s measurable, Rosenthal said.
When people hire strong talent, “they replicate,” Rosenthal said. That doesn’t always mean the company ends up in the right place, but it can define its direction.
“I’m just consistently reminded that the success or failure of these enterprises often starts with like, the first four to six people,” Rosenthal told BI.
5. Have a ‘durable strategy’
Rosenthal said that a lot of founders have a thesis but end up reacting to whatever happens along the way.
“It’s the building-the-plane-while-you’re-flying-it approach,” Rosenthal said. “We hate that approach.”
Rosenthal said that’s how he operated when he was 23. At 40, though, he wants to measure 20 times and cut just once. While a lot of people may have a good idea, founders need to be able to accomplish that vision, Rosenthal said.
“I think it’s important to really have a durable strategy, not just a thesis,” Rosenthal said.
Mitra said that even if things are going well, businesses will inevitably have to experience downturns, whether from geopolitical issues or other challenges. Sometimes, he said, you have to “miss the hype and sit something out,” because it’s not the focus.
