I thought I would re-surface Fred Wilson’s post on Investor and Operator VCs from a few weeks ago. This topic is one that arises frequently in venture capital and it’s relevant for Vocap, as several of us are former entrepreneurs and operators. That said, this is a bit like the debate of whether it’s better to be younger vs. older when you are launching a start-up. Benefits can accrue in both cases, and you can’t boil things down to a single variable like age or operating experience.
Fred takes a very balanced approach to the topic, pointing out both the benefits of entrepreneurial experience, as well as the strong success of many VCs who did not have an operator background (Fred being a prime example). It’s clear at this point there really is no one single path to a successful career in venture capital investing. There are, however, key skills that need to be developed to be a good VC. Entrepreneurial and start up/growth stage operating experience can be a great way to build these skills, and can enable a VC to add a lot of value for portfolio companies.
Here are a few more thoughts on this topic:
- Experience Matters – no matter how you acquire it, domain knowledge, business networks, and experience in evaluating/coaching/managing people are all critical in determining where to invest and in working with entrepreneurs to grow investments. As an entrepreneur, I needed board members and advisors who could help our team avoid common start up mistakes, learn how to best manage cash, provide guidance on when and how to scale marketing and sales processes, help my partner and I find great team members and develop key industry contacts, and help keep us centered on the roller coaster of ups and downs that come with building a company. Experienced entrepreneurs have typically been through a trial by fire one or more times in these areas, and often have sage advice.
- Strategic Mindset – I agree with Fred’s point about a strategic mindset benefiting venture investors, and I would emphasize this for early stage. Unlike late stage, Seed and Series A round investors typically don’t have the luxury of assessing fully formed companies in established (or already quickly growing) markets. Therefore, vision and strategy are critical skills for investors at this stage, and can be of great value to the companies they invest in as the management team works through company formation and scaling. This skill set is not a given with former operators, as Fred points out, so caveat emptor for entrepreneurs as they seek investor partners.
- Intelligent Risk Taking – Fred doesn’t call this out, but I would add intelligent risk taking as a key skill set for VCs. Venture investing is not for the faint of heart and there is always substantial risk involved in building a company to scale. Big success stories may look obvious now in hindsight, but the picture is pretty cloudy when the company has a small customer base, is still assessing or trying to prove out a go-to-market strategy, and trying to get a firm grip on its unit economics. Anyone can take risk and throw money around, the skill comes in the ‘intelligent’ part – weighing the potential risk against domain knowledge, an assessment of the people involved, the product/market fit and the potential timing of bringing a new solution to market. Entrepreneurial experience helps to develop this type of intelligence.
- Financial Orientation – Fred alludes to Boston’s financial orientation as one of the reasons it didn’t keep pace with Silicon Valley in the 70s and 80s. I am not enough of a historian to debate the finer points of this time period in venture investing, but I do believe seed stage and early growth stage investing is not well suited to those with just a financial background and financial orientation, primarily due to my points above. VCs focused on earlier venture stages need to develop knowledge and experience in addition to what pure financial roles can provide.