The Paradox of Venture Capital
There’s a paradox at the heart of venture capital (VC) that often goes unspoken. On one side, we as investors are painstakingly careful. We spend months scrutinising every pitch, every founder, every number, and look deep into frameworks, psychometric tests, reference checks – the works.
Yet, despite this care, the truth is, a significant portion of investments will fail. Depending on who you ask, between 25 to 30 per cent of VC-backed startups fail outright, and if you look at returns, as many as 75 per cent do not generate positive gains. That means only one or two out of every ten investments deliver substantial returns. It’s a sobering reality, but one every investor learns to live with.
Our Mission and the Challenge of Shariah-Compliant Investing
At Ficus Capital, since we began investing in 2021, this truth has been front and centre of all our decision-making. Our mission is, and continues to be, to back strong companies led by capable founders. All this within a Shariah-compliant framework – meaning no financial hedging or risk-shifting tricks that conventional VCs might use. It’s a different kind of challenge, forcing us to focus even more on the people behind the business.
Theory vs. Reality: The Messiness of People
Our theory did not always hold up perfectly in practice. While our framework is solid, the reality proved messier than any checklist could capture. We assumed that it would be possible to identify the right founder – someone honest, resilient, trustworthy – and there was a belief – perhaps somewhat naïve in hindsight – that long-standing association would provide deeper insight. Yet, it became clear that pressure can reveal aspects of character that friendship and familiarity simply don’t.
Revelations: The Good, the Bad, and the Unexpected
There were surprises – some positive, others not so much. Despite all our careful vetting, we ended up backing founders who turned out to be, unfortunately, not whom we thought. Although we used every tool at our disposal – psychometrics, references, even 360-degree team feedback – we still missed it.
To illustrate, two founders in particular created significant challenges. Both initially appeared very personable and communicated well, but later it became clear they were not entirely truthful – each for different reasons. One founder was primarily motivated by making money off investors, while the other was dishonest out of fear of potential legal action from previous investors.
In the first example, after investing, a founder completely ignored our requests and failed to follow through on commitments. The company was ultimately liquidated, and the founder moved on to start a new venture. Interestingly, one partner had expressed discomfort with this founder from the outset, but because most did not share the concern, the investment proceeded. While we lost money on this company, we recouped some of it through equity in other startups the founder was involved with.
The second case involved a founder who had undergone an extensive 18-month due diligence process led by a major overseas VC, which included psychometric tests, reference checks, and stress tests – all positive. However, just as we were about to complete the investment and release funds, irregularities in the founder’s communication triggered our gut feeling that something was amiss. Although the due diligence was thorough, we decided to disburse only two-thirds of the investment. While it seemed we lost that portion, following our inner judgement ultimately saved us the remaining third.
These experiences reinforced a crucial lesson: while data and scientific assessments are invaluable, gut instinct and watching out for red flags plays an essential role. The challenge lies in balancing intuition with the legal and financial obligations inherent in investment agreements. Listening to your inner voice can minimise losses, but it also carries risks, such as potential legal complications. Ultimately, it’s about finding the right balance between science, art, and intuition.
On the flip side, and on a brighter note, some companies surprised us in the best possible way. Startups that initially struggled to tell their story or whose initial business model felt, well, a bit narrow, showed their brilliant colours in the long-run.
This happened over time, with encouragement and a few pivots – examples being one investee that expanded their 3-D design tool to become a full-blown education application, while another that grew from just Wi-Fi sharing to routers – uncovering entirely new markets.
These moments remind us that potential doesn’t always shout; sometimes it just mumbles.
Operational Realities: Due Diligence and Documentation
Operationally, we faced challenges too. Many of our portfolio companies were early-stage and had little experience with institutional fundraising. In these cases, due diligence dragged on longer than expected and documentation was patchy. Furthermore, negotiations over agreements were drawn-out, with some taking months. It was frustrating, but oddly, I now see this as part of our role – not just as investors but as partners helping startups mature their processes and prepare for future rounds.
The Biggest Lesson: Founder Character Is Everything
If I had to pick a key realisation so far, it is this: founder character is everything. Not just intelligence or charm, but honesty and grit. I used to think these traits could be measured objectively, but now, if something feels off – even if I can’t explain why – I pay attention. Learning from this, we introduced a final confirmation step before releasing funds, to ensure nothing has changed since due diligence wrapped up. Is it foolproof? No. But it’s a little safer.
Managing Uncertainty: Balancing Science and Art
What this all boils down to is that venture capital, at its core, is about managing uncertainty. The numbers and frameworks matter, but people matter more. And people are unpredictable. Sometimes, you do everything right and still lose. Other times, a long shot surprises you. That unpredictability is part of the game – and part of what makes it so challenging.
Looking ahead, we are doubling down on founder integrity and trusting our instincts alongside the data. We accept that failure is part of the journey, but by focusing on character and resilience, we hope to improve our odds.
Embracing Risk and the Human Element
For me, the real takeaway is that success in venture capital isn’t about eliminating risk altogether but rather about learning to live with it and perhaps, on some days, even embracing it.
At the end of the day, in a world where most bets don’t pay off, it’s the few that do – and the people behind them – that make it all worthwhile.
Key Lessons Learned from Ficus Capital’s Investment Journey
- Failure is expected: Roughly 25–30 per cent of VC-backed startups fail outright; up to 75 per cent may not yield positive returns. This is an inherent part of venture investing.
- Founder character prevails over metrics: Honesty, resilience, and trustworthiness are more important than intelligence or eloquence – though harder to measure.
- Gut instinct matters: Even with extensive due diligence, intuition often signals risks that data misses.
- Potential can be hidden: Some startups may initially struggle to articulate their vision but can pivot successfully with the right support.
- Operational support is crucial: Early-stage companies often need help navigating due diligence and legal processes.
- Risk management requires process and flexibility: Introducing safeguards like final pre-disbursement checks can mitigate risk but cannot eliminate it.
- Venture capital is both science and art: Balancing analytical rigour with human judgement is essential.
- Failure is part of the journey: Accepting and managing failure is key to finding the few investments that succeed.
This reflection looks beyond frameworks or numbers. It’s about the messy, unpredictable reality of backing founders and their visions. For us at Ficus Capital, it’s a journey of continuous learning – balancing science with art, data with instinct, and theory with the unpredictability of people. At the end of the day, that’s what keeps it interesting.
