Investor VCs and Operator VCs
The Venture Capital business is full of great firms that were founded by entrepreneurs/operators who became investors mid/late career. From Gene Kleiner and Tom Perkins in the early 70s to Marc Andreessen and Ben Horowitz at the end of the 00s, this is the iconic model of the venture capital firm and the formula that built Silicon Valley into what it is today.
When young people ask me what the best way to get into the venture capital business is, I tell them “go work in startups in your 20s and 30s, and then turn to venture capital in your 40s and 50s.” That is certainly the best way to do it. You build domain expertise, operating experience, and relationships/networks that help you win deals and help entrepreneurs by doing it this way.
The only problem with that advice is that is not how I did it. And it is not how Mike Moritz did it. And it is not how Jim Breyer did it. And it is not how Bill Gurley did it. And it is not how Peter Fenton did it. And it is not how most of my partners at USV did it. It is not how many/most of the top venture capitalists in the business did it. And I have been mulling over this fact since coming to that realization a while ago. I ruminated a bit on it in the Q&A after the lecture I gave at MIT a few weeks ago.
I think there are a bunch of reasons why many of the best VCs, at least of my generation, were not entrepreneurs and operators before becoming VCs.
First on my list is “avoiding the temptation to operate.” Jerry Colonna tells a story about one of the first Boards he joined at Flatiron. Jerry had been an operator before leaving to form Flatiron Partners with me. He joined the Board of an early stage company and on it were a couple experienced VCs. Every time the Company struggled with an issue, Jerry jumped in and tried to help. Eventually, one of the experienced VCs pulled Jerry aside and said “You aren’t an operator anymore Jerry. You have to let them run the Company.” I have never had that issue. I am not an operator and have never worked in a startup or a company, other than a short stint in an engineering firm the first two years out of college. I wouldn’t know how to manage a team, run a business, lead a company. But I know how to manage the people who do know how to do that. There is a huge difference and I think that VCs who aren’t handicapped by operating experience bring great respect for operators. And that helps a lot.
The second reason on my list is “a strategic mindset.” I think of strategy as the opposite of execution. Strategy is about setting the stage for execution. Many of the best strategic minds I know aren’t operators. They are consultants, analysts, investors, pundits. I don’t know exactly why brilliant strategists often make terrible operators but I see it all the time. And all of the best venture capitalists I know are brilliant strategists. They understand where value is going to be in an emerging market, they understand how to get to the best strategically positioned companies first, and they understand how to guide those companies toward a strategy that wins the market.
The third reason on my list is “being a portfolio player.” Operators work on one thing all the time. VCs work on many things at the same time. In one day, I can be trying to win a deal with one company, working an M&A situation for another company, doing a strategy offsite for a third company, helping a fourth company develop its compensation plan, and sitting in a board meeting for a fifth company. That’s a typical day in the VC business. You have to love having your hands in multiple things all the time and the diversification that comes from that. You aren’t all in on anything but you are all in on all of it.
I am not saying that entrepreneurs/operators don’t make good VCs. Obviously, they do. The entrepreneur oriented mindset that firms like Kleiner Perkins brought to the VC business is why Silicon Valley emerged as the best place in the world to do startups. And being too financially oriented is why Boston failed to keep pace with Silicon Valley in the 70s and 80s.
What I am saying is that there is something about the other pathway into VC, via investing, consulting, writing, that works equally well, or better in some cases. And all you have to look at are the top investors in the business to know that.