Investing in Startups

Paul Capon '13 on his path to venture capital and his advice for breaking into the industry.

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A Q&A with Paul Capon '13, Managing Partner of LunaCap Ventures, a venture capital firm that provides financing to early-stage companies with Military, Women, and Minority (MWM) founders and leadership.

How did you break into venture capital?

My path to venture capital is not what I would consider to be "traditional." After five years in the military and two tours in Afghanistan, I attended Columbia Business School and London Business School. My strengths were operations, leadership, and execution; however, I knew I was very weak on the accounting and finance side of things. For this reason, I took a job (lower paying than other offers) in a finance/restructuring role to force myself to improve on these weaknesses.

I always knew that VC was something I wanted to do, but I knew that to be successful, I would need to know both the operations and finance side. I was fortunate to have a runway financially, so I was able to work with a VC fund for a year without taking a salary. While that year was very entrepreneurial and extremely nerve racking, it enabled me to meet and learn about the startup environment and network with everyone in the industry.

Breaking into the VC community is probably the most challenging part, but once you demonstrate your understanding of the industry to the right people, you can work your way up from there.

How did you develop the necessary qualitative skills for investing in a company?

As investors in early-stage companies, the two biggest things to consider are timing and team. In regard to timing, you need to think about whether the market is ready for the product and stage of the company, and if the timing is right for the company to use your capital. From a team perspective, this is where I’d emphasize the soft skills. In the military, we were put in charge of teams consisting of 150+ personnel, and it was our job to place the right skillsets and personalities together to achieve an objective. In a sense, I learned by doing and seeing what worked and what didn’t – I became used to running many smaller "companies" within my flight and working through personality and skillset issues. The more you work in the startup community and run small teams, the more you can develop this skillset and apply what worked in your future investments.

Integrity is most important. It’s the foundation for all relationships, including a founder and investor.

Could you describe a time when you failed as an investor and what you learned?

The first personal investment I made before I started the fund was a learning-through-failure experience. I was eager to start investing as an angel, and I believed in the entrepreneur, the idea, and the product. After making the investment, the entrepreneur made no progress and I had to write off the investment as a loss. I learned very quickly that I didn’t have a solid grasp of what market asks were from the investor’s standpoint – there were many asks I could have (and should have) included in our contract to protect me. Additionally, I learned that other investors had experienced the same loss and disappointment, which taught me that it was important to know and talk with the other investors. While much of this seems like common sense, we are continually learning and focusing on how to improve our process and understanding of market asks, as well as ways to protect ourselves without limiting the entrepreneur.

What attributes does LunaCap Ventures look for when investing in a startup?

Because our investment instrument is venture debt and equity, we are focused on companies that are capable of servicing our debt with their current cash flows. In addition to this unique hybrid investment structure, we focus on Military, Women, and Minority (MWM) owned companies as part of our impact investment theme. Technology and scalability is very important to us. However, unlike many of the traditional tech companies, we tend to focus on consumer product based companies, so we put a lot of weight on experience and team capability.

What are the most important factors you look for in a founder's character?

Integrity, leadership, and grit. Integrity is most important. It’s the foundation for all relationships, including a founder and investor. Leadership from the sense of creating a vision, building a well-oiled rock star team that’s complementary, and motivating people to push forward and execute. Lastly, grit and the ability to tolerate tough times, especially considering the hurdles and rejection rate most entrepreneurs face daily.

Special thanks to the Venture Capital Club for their collaboration on this article.

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