Five Reasons Why VCs Need PhDs
A venture capital investor should have high intellectual and emotional intelligence. The job requires solid quantitative analysis but also is a form of art and requires strong qualitative judgement and communication skills. When making an investment decision, investors should be able to predict what will happen in the lifecycle of a startup, which is five to ten years from today. They should be able to predict how things will evolve. They should understand how the technology works and how it can evolve as the startup they are evaluating matures.
Here is an example:
A new solar cell technology called Perovskites was reported in 2009 by a Japanese researcher. Now, in 2023, after thousands of publications and patents from prominent research groups, a startup comes to you and claims to have created “the solar cell.” As an investor, you might not know the history of solar cells, but you should be able to evaluate the potential of this investment. You need to be able to understand the founder, communicate with them, and predict if this technology is rapidly evolving or has matured. What if another solar technology appears that has a better efficiency or stability? What if there are better patents out there? How would you know? How would you price this risk into the deal?
But how can VCs answer all these questions quickly, especially in a highly narrow scientific field? I am recommending to overcome such challenges VCs need PhDs.
1. VCs need to ingest and distill information quickly
VCs need to have the capacity to analyze, select, and condense large volumes of data into a well-structured collection of arguments or strategic insights that contribute to an investment thesis and investment decision.
A PhD is trained to be quick in grasping new ideas, synthesizing information and presenting it to their team. If researchers are not quick, someone else will publish their idea in a better journal. For PhDs to survive, they had to constantly generate new insight and learn new skills to elevate their research work.
2. VCs need to perform robust due diligence
Investing in startups is a high-stakes game where thorough research and meticulous due diligence can make or break a deal. The due diligence process, both on the business and on the technology side, is a rigorous and time-consuming process.
PhDs are well-versed in conducting exhaustive research, gathering data, and analyzing information from various angles. They should be able to quickly understand scientific publications and patents irrespective of their domain expertise. These skill sets can significantly enhance the diligence process, ensuring that investment decisions are based on a solid foundation of knowledge.
3. VCs need to have an analytical mind
Numbers pop up everywhere, and investors should be quick in analyzing numbers and making a decision. Having an analytical mind and quantitative literacy is key to a successful VC.
PhDs with a background in STEM research are comfortable analyzing trends and data and generating hypotheses based on data. Moreover, PhDs are strong in generating forward-looking hypotheses, doing research quickly and analyzing information efficiently, enabling them to develop investment thesis around a technology.
4. VCs need to show domain expertise
An early-stage investor who just cuts checks will soon realize that it's losing high-quality deals. Strong founders and startups demand more than just the check. VCs need to show their value add, which mainly comes from domain expertise from operational experience or academic work.
As more investors are falling in love with investing in decarbonization, circular economy, clean tech, and deep tech, having PhDs who have deep domain expertise in materials, chemistry, nanotechnology, etc. will be essential.
5. VCs need to be able to communicate with founders
VCs need to be able to understand the technology, not just to underwrite the risk, but to sound useful and smart. One of the main reasons I decided to become a VC was to support the commercialization of science by being the bridge between deep tech founders and the investment world.
PhDs are connected within academia and research institutions and can form a bridge between VCs and the innovation ecosystem. Their networks can facilitate access to cutting-edge research, top-notch talent, and potential collaborators, strengthening a firm’s position in the market. Additionally, PhDs can talk science, enabling them to communicate with highly technical ventures.
Maybe I am biased, but in a world where science reigns supreme, venture capital firms must adapt and evolve to stay ahead. The inclusion of PhDs in their team represents a forward-thinking strategy that can provide a distinct competitive edge.
Remember, having a PhD does not mean much and not all PhDs are created equally. However, from what I have seen in the top North American schools PhDs are trained to be resourceful. Degrees are meaningless; the ability to spot winners is the only skill a VC needs to succeed.
