The Chess of Venture Capital: The Pieces and Their Movements

“The game of Chess is not merely an idle amusement. Several very valuable qualities of the mind, useful in the course of human life, are to be acquired or strengthened by it…. For life is a kind of chess, in which we have often points to gain, and competitors or adversaries to contend with, and in which there is a vast variety of good and ill events, that are, in some degree, the effects of prudence or the want of it”. — Benjamin Franklin

Just as in a chess game there are kings, queens, towers, bishops, horses and pawns; Venture Capital has entrepreneurs, investors, advisors and promoters of the ecosystem. Each of them is important and fulfills a certain function. To play chess you need to know the pieces and how they work, there is no one who plays a game of chess without having understood the rules. Whether you’re an entrepreneur raising capital, an investor looking for investment opportunities, or any other ecosystem participant, you need to understand how Venture Capital is played.

a) Entrepreneurs are those who detect a problem and try to solve it through technology, generating development and economic value throughout the process. Entrepreneurs can be categorized as follows:

- First-time entrepreneur vs serial entrepreneur

The first-time entrepreneur is the one who is moving his pieces for the first time in his life. Most learn empirically, others receive guidance from incubators or accelerators. This entrepreneur faces many challenges that he must assimilate in order to be successful. Usually these entrepreneurs continue trying until they become serial entrepreneurs.

The serial entrepreneur is the one who has developed multiple strategies, played several games throughout his life and knows how to play specially in adverse scenarios. This individual understands how to develop a business model, reach “product-market fit”, raise capital and grow the business. These entrepreneurs have developed a character that allows them to make decisions in an assertive and mature way. According to HBR, entrepreneurs who have been previously successful have a 30% chance of success in their next venture.

- Newly graduated entrepreneur vs experienced entrepreneur

Sometimes recent graduates try to undertake; however, the results are often quite negative as they do not have experience in business, management processes and network of contacts to obtain capital or develop the company. That’s why experienced entrepreneurs; that is, those who have already worked in a company, tend to be more successful.

Native entrepreneur vs corporate entrepreneur

Startups, as they grow, hire people who develop on a par with the company. They are exposed to the successes and mistakes of the startup. At some point their entrepreneurial spirit makes them start a project on their own in which they take advantage of the experience and network of contacts acquired. As an example, Dustin Maskovitz, creator of Asana, started out as a Facebook employee.

Professionals who have forged careers in corporates take the decision to pursue new challenges by solving problems through entrepreneurship. They use all their corporate experience to be able to face such an arduous task. For example, Eric Yuan founder of Zoom worked at Cisco for several years before starting his own company.

b) Investors: Just as the ecosystem needs builders, it also needs players to strengthen the environment. These can help the ecosystem in a variety of ways, from providing capital, knowledge to contacts.

- Ecosystem drivers

In underdeveloped ecosystems or industrial sectors, driving force is required to increase and develop the VC. Governments have a significant stake through investments to funds lost in startups and VC funds. Corporate and universities often complement governments by investing in startups; examples include Israel Innovation Authority, Shell Foundation, MIT, among others.

- Non-institutional investors

These investors often enter companies with smaller investment tickets at an early stage. They are characterized by extremely flexible processes and a slightly more relaxed portfolio monitoring. They are usually family and friends, angels, accelerators and crowdfunding investors.

- Institutional investors

They are professional investors with a defined structure, robust investment processes and portfolio management mechanisms. Investment tickets are usually higher, as well as the rights requested at the time of investing. In addition to the capital, the value they bring to the entrepreneur comes from multiple sources.

- Limited Partners

Investors of investors are the Limited Parterns, who are usually institutional investors such as pension funds, endowments, family offices, sovereign wealth funds, multilateral bodies, among others. These investors rely on VC fund managers for financial returns.

c) Advisors: These are those individuals and companies that provide a specialized service and as consideration receive economic remuneration. The main advisors in the VC ecosystem are:

- Lawyers: They support the establishment of the investment vehicle, the structuring of capital raising, the governance of the company, among others.

- Fiscal advisors: Provide advice on the structuring of the investment vehicle or in raising capital to minimize the tax impact.

- Bankers: Advise on the capital raising for funds and startups and in outbound operations such as IPOs and M&As.

- Independent advisors: Provide tailored advice to funds and startups.

d) Ecosystem Promoters: Its main role is the dissemination and promotion of VC activity, the monitoring of such activity through research and interlocution with governments.

- Associations: They are organized groups of ecosystem participants whose purpose is to promote the VC and seek favorable results for all members. Examples include LAVCA (Latin America), IVCA (India), Startup Nation Central (Israel), GCV, ABVCAP (Brazil), among others.

Like chess, VC is a strategy game. Remember that a chess master knows his pieces and his movements to use in his favor. Understand participants very well and plan your game so you can reach your goals.

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Gonzalo Soriano. VC Investor at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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