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.
Cool insight. Can you list the top 3 traits that make entrepreneurs/operators great VCs?
understanding probability theory is one of them
You’re probably right
Lol, I hope that you and @jasonpwright:disqus are both here all week.
And independently so.
Knowing what you don’t know. Don’t know if top 3, but its right up there for any investor.
Nobody knows what they don’t know.
Disagree.”You don’t have a competence if you don’t know the boundaries of the competence”- Munger.
That’s not what you originally said. Perhaps you meant, “knowing that you don’t know everything”
No, I meant what I said earlier – “Knowing what you don’t know”.”Knowing that you don’t know everything” is different, and prima facie applies to everything and everybody.”Knowing what you don’t know” is about knowing the edges of what you know.
also important to be open to the possibility that what you think you know may be wrong or might have changed.
I don’t know about that…
I know, right?
Ambition, Competitiveness, Experience
Was thinking that’s tomorrow’s blog post
There probably is another one to add to the list. “Knowing how to pick winners.” I feel great VC’s have an innate ability to pick winning teams. By picking these entrepreneurs, who aren’t always engineers or the smartest kid in the room, they probably assist a winning VC more than anything else as they are the operators who run the businesses. If a great VC chooses a poor team they would have to have operator knowledge to guide them through from start to finish.
winning is honestly everything.
Good VC investors = good gut instinct to judge people
VCs like to claim that they are “value adding”. Many VCs equate value adding with introducing a potential hire, helping to interview some candidate, or generating a random business opportunity. While all of these efforts are good, nothing, in my opinion, is as important as bringing the strategic mindset. I know it may sound like something everyone is doing, but very few people really know how to do it. It means understanding the market, the team and their capability (and weaknesses) so well that by engaging people in constant intellectual discussions, you can collectively figure out a more effective path for the company.
Fred as someone who has been a VC for 7 years before starting my own businesses for the last 10 (and have worked with some of the people you mention above) I think the answer is more complex: to be a great VC you need to be as creative and as entrepreneurial as a great entrepreneur/operator. Both professions operate in an unpredictable business environment and need to take advantage of trends and cycles and hire/invest in great talent. But these professions have also distinct capabilities and different mindsets. Both also need good mentors and for VCs a fair amount of time until you develop the right pattern recognition. The only thing that doesn’t work is when someone succeeds as an entrepreneur and thinks being a VC is going to be easy (or being a successful VC and thinking execution is easy)
As someone who is on the journey – albeit circuitous and still incomplete, from consulting to VC, this was a great, helpful post.The turn of phrase “strategy as the opposite of execution” did catch my eye. I am not sure that strategy is really the “opposite” of execution. Opposite implies a duality that might have made the late Robert Pirsig cringe.I worked in the strategy practice for a large, well known consulting firm for 6 years. At least during the time I was there (I have since heard things have changed), there was prevailing view that doing strategy and doing execution were opposite, even opposing tasks, done by different people with different skill sets to such a degree that it felt, to me at least, that there emerged a corporate cultural ethos that the people who did strategy were somehow superior to the people who did operations and technology (this played out in compensation). From my vantage, this was corrosive to morale and discouraged collaboration. Moreover, it made is difficult to impossible to recognize the importance of emergent strategy — the process of discovering previously unidentified strategic possibilities (or blockers) to strategy unearthed through iterative execution.”Opposite” can also manifest as opposite levels of fundings where in an organization the strategists and their agencies are given millions of dollars to literally burn away on bong hits while the people in the trenches creating actual concrete customer value are left with little to any funding.More broadly I worry that cleaving strategy too far from execution can lead to cult of personality of “digital prophets” (see https://www.washingtonpost…. and younger people especially believing its ok to “live in the clouds” without ever giving much thought to how hard things get done outside of PowerPoint and Ted Talks. Chess also teaches us that execution and tactics can not be separated from strategy. In the hands of those less wise than our host, a perceived oppositeness of strategy and execution can lead to things like the Fyre Festival — situations were people, sometimes empowered and enabled by money – lose sight of and become dismissive of execution as just something the hoi polloi will attend to.I accept that there are some people who are great a strategy and not so good at execution, and vice versa. I just worry about the specific word “opposite” and I’m picking at that a bit…
Great comment.> there was prevailing view that doing strategy and doing execution were opposite, even opposing tasks, done by different people with different skill setsNot true, as you rightly say. Depends on the person. A good counterexample might be Lou Gerstner, the CEO who turned around IBM in the 90s. I’ve read his book Who Says Elephants Can’t Dance, and IIRC, he was into consulting at McKinsey and a few other jobs before he became CEO of IBM.https://en.wikipedia.org/wi….http://hbswk.hbs.edu/archiv…http://www.mckinsey.com/glo…http://www.amazon.com/Who-S…
I do believe they are very different skills and very few people do both well. One is macroscopic and the other is microscopic. One needs the ability to see possibilities and what’s around the bend. The other needs to get shit done. One is a dreamer who understands higher order effects and the machine that generates the outcomes. The other is tactical playing block and tackle every day with people, processes, systems, and clients.It is not opposite but personalities, abilities and natural dispositions are not similar in most cases.But your point about not calling them complete opposites is very valid and the unintended consequences of this can lead to an unnecessary schism.
The flip side of this is – what do entrepreneurs need- an ex-operator VC or a VC VC?I think startups benefit from exposure to a variety of VC / investor / advisors / coaches types-, which is why there probably isn’t a right / wrong way of doing it.
agreebut the majority of these outside influences are not necessarily investors.or not true in your experience?
investors, typically have the ears of the entrepreneur, first.but a good entrepreneur needs to round themselves up with outsiders/non-investors too.to answer your question, maybe 50/50.
This is really true.KP flourished when deep tech plays were best led by product mavens w no operational expertise and an environment where there were very few operators to pull in.Time and place.
I liked the VC VC that would connect me with other operators that had gone through similar experiences. Those that tried to give operational advice without relevant operational experience were very draining – I was lucky and had very little of this problem through 2 sets of VC in 2 startups.
Having access to choice so the entrepreneur can decide what they are benefitting most from would be best.
Both, but the founder needs to be careful to guard against “mentor whiplash” (advice and analysis that distracts from decision-making and doing).An operator VC has driven the car before. A great VC VC has helicopter vision to tell the founder where to swerve the potholes in the road ahead. In both cases, there’s no guarantee the operator and/or VCVC will get the founder to a great exit.My journey so far is product inventor in chemical industry (in one of world’s largest flavors+fragrances co) to startup operator (one was a hedge fund applying AI; the other a data startup jv with the FT) to strategic investor+corporate strategist (UBS) to VC (from 4 of us to 80+ employees globally) to systems inventor. All before 33 because I was lucky to get onto the path of first role when I was 17.I’ve heard great opinions and also shockingly bad advice in how to make Natural Language AI systems better for everyone.Fast forward to 2017 and, whilst the AI community is only now waking up to the data biases and “we don’t exactly know how Deep Learning does what it does” problems,* https://www.technologyrevie…… my systems solution has already passed the prior art test in the patent process, including against citations from MS.I dived down a wormhole through 2000+ years of Reasoning (in expedited time) and managed to emerge with a systems solution that not even Google’s cleverest PhDs could imagine or code.And I know they’re stuck because their Google Research PhD, who created Inception and DeepDream, said so on 02 March 2017 at SF AI meetup.There are lots of great operator and VCVCs out there. Did any of them have the advisory knowhow or the courage to make that wormhole journey?It’s entirely possible I’ll return to VC in my next career cycle. I’ll be one of the few VCs with that type of “wormhole of invention” knowhow plus the other skills from before.
the people who see the big picture have a wide-eyed panoramic lens built into their brains; the ones who execute well can zoom to unbelievable levels of resolution. it is indeed hard to do both, at least not well, and at least not consistently well.It is to the benefit of the founder to have access to both types and more.I am thrilled to see this post because there are different types of people in VC and among startup founders that often goes unacknowledged. Generic statements like “the VC has no operational experience and might not be effective”, or “the founder is not an engineer, can he pull this off?” are not very helpful.
I loved your answer to that question in the Q&A. It felt like you were wrestling with your instincts.FWIW – I spent a lot of time through a series of interviews looking for common patterns to success in a field. I learnt that there aren’t any. We all make it up as we go along and try to make sense and find patterns when we’re on the other side.My guess is that what is actually common about these people is that they cared, got lucky on occasion and took the initiative to make the most of their opportunities to do good work and make all that luck count.
Felt the same way about the answer in the MIT talk!
Nice to hear. Happy Monday, Susan! 🙂
Happy Monday to you too!
They cared. Exactly
==> You aren’t all in on anything but you are all in on all of it. I think you mean ==> You aren’t all in on anything but you are a little bit in on all of it.
Fred (or others): I’m new to your work and really enjoying it. Is there a place / post / talk / link where I can find out more about the moves you made, per the last paragraph in today’s post, to break into the VC world and prepare yourself to thrive in it?
There is a bias among VC firms, and LPs right now to hire/invest money with operators. In the old days, you could work as a consultant or on Wall St and then hop over to VC. Tougher to do that now.A VC is like a coach. You can help draw up the play but you can’t play the game.
What do you think is driving this bias ?
Dunno. Have seen it over the past number of years. I think it’s because of the idea behind Fred’s post. VC’s sell themselves as being “active”. What’s active mean? I also think it helps a VC firm to have both people like Fred and operators. Had an old Chicago VC tell me once the best firms are 60% generalists and 40% operators. I was never an operator in the classic sense, but my partner was.
That is actually a decent mix–no?
Thanks, good to have your perspective.Your comment – “Whats active mean ?” made me chuckle about something a little tangential. Whats active mean ? – is a question that I think will get increasingly asked of active non-venture funds as well. A number of “active” mutual funds that are actually “closet indexing”…
If Fred is correct this is non intuitive.Is this just Chicago and Fintech or in general as you are in a very specific market with a very deep and specific expertise?
why the trend in your opinion?
no idea, but usually trends emanate from risk aversion
tough scenario it appears.but you guys seem to have the cred and obviously you can pick winners.
usually trends emanate from risk aversionThis is a really interesting statement. I’d love to hear you unpack that — maybe a good blog post.
And the ones who navigate through the risk start companies!
True and trends also emanate from following patterns of competitors as well.
As I said above, Kondratieff wave theory applies.VCs respond to their market conditions. VC heading back into deep tech plays were product mavens will be their core investees. Those folks will need operations help in spades and it will be hard to find (media execs are hanging off of trees, there is never a shortage, which is why VCs didn’t need to be operators for the last 20 years).Fred’s an anachronism: an intuitive diviner of consumer media markets. Like most of us over 50, he is close to his Best Before Date: no operations, no HW, no manufacturing experience. KP would have never hired 2017 Fred (1993 Fred, however…….)The one constant is change, but the K man was right: if you stop back far enough, you can see the wheel come around again.
Yup. 100% agree. I want to be Pop
If a startup has two major tasks (simplified)1) Finding and creating the right business model2) Building and running an effective and efficient organization (Built to last hopefully)The ideal VC will be able to provide strategic advice in both, however operator capabilities and knowledge should be particularly helpful with the second part (e.g. facing liquidity issues, scaling, HR), which then again gives the resources to work on the first part. I would assume the game is getting more intense and therefore every bit of advantage counts to make it happen.
Great post!Quick question about building a strategic mindset. In my opinion, its talking to many people, reading heavily in non-fiction (and sometimes fiction), reading annual reports, industry analysis, blogposts.What are ways to build a strategic mindset?
Fred, I would think that the primary advantage you bring to the entrepreneurs that you work with is external objectivity delivered in a courageous way. That objectivity comes from unfiltered experience across many similar scenarios, “reading their label” because they are inside their own jars.https://uploads.disquscdn.c…
I relate to the reference you made about Jerry. As a former operator I have to regularly remind myself it’s the founders’ company and they need to figure out details of the execution. Though I do think a VC’s operations experience comes in handy in a variety of other ways.
A good VC needs a little distance from the company for perspective like a good offensive coordinator in the box above the stadium. It helps to see the whole field.
It’s the natural cycle of things – the reason it’s changed over the years is because of specialization and focus.To be/remain competitive in a more established game you’ve got to work harder, smarter, faster and be more focused than you did back in the small world and casual pickup games.Which means developing different and more complete skills than you used to have to have…
I’ve been waiting for you to talk about this. Saw the quandary in the MIT talk. Had a lively discussion about it with my son. He is 20. He liked that you didn’t know the answer and were honest about it. I like how transparent you are about what you are thinking about. I think young people are inspired by that.
I love when people don’t know the answer and are honest about it. Always having the answer means to me you are dogmatic and don’t think about the possibilities.In this case I agree, it depends. I think it would be hard for me make a good VC.I do now have some passive investments, but I consciously fight my instinct to jump in.People like to say “you have to have been an operator” not true.On the other hand just being a “money” person doesn’t work as well.I think the biggest character trait (in addition to intelligence and pattern matching) a VC has to have is the ability to not fear losing and lose gracefully. Now this seems counter-intuitive.I am the one that always says second place is the first loser. I say the worst thing is to come in second place you might as well not have entered the race. I refuse to let my kids take a trophy for “participating”But over my quarter of a century in the business, I can say that if you fear losing you will flail and cause fear and anger in those around you.Let me give an example. Two years ago we put on a conference. Due to a host of things we lost a lot of money. Now my brother who is literally a genius was pulling his hair out. But the conference was a roaring success for the first year. His instinct was to pull the plug. Mine was to double down. This year it was gangbusters. But the only complaint? We cheaped out on the food (I didn’t micro-manage that)I think like a great general you need to be able to look defeat in the face and smile knowing that things might turn around or you might lose, but either way you were happy to be in the fight.
I am the one that always says second place is the first loser. I say the worst thing is to come in second place you might as well not have entered the race. I refuse to let my kids take a trophy for “participating”Losing though has as much to do with who the other competitors are as the effort that you are putting in. And you have zero control over who the other competitors are (other than to not even enter the race to begin with if ‘smart’ enough to do so).Now my brother who is literally a genius was pulling his hair out.Simplistically I call this pattern ‘genius who doesn’t know how to deal with adversity’. I saw this at Wharton/Penn first, years ago. Classmates (many of them) top of the class in their high school but couldn’t deal with getting a ‘B’ on a test. Not having to work hard until in a more challenging environment and no way to deal with the setbacks. I never had this issue at all. It was always difficult for me, school that is. So I was well versed with academic adversity and just kept slogging through with zero psychological impact.My stepson is probably close to a genius at math. But gives up almost immediately at things that don’t come easy that I would spend 8 hours on if I needed to and not even break a sweat. Like the old days of figuring out a computer problem (that you can easily google the answer for now..) 8 hours of ‘try this, try that, start again, try the next day’.
Sports where there’s only one winner: 100m, tennis, golf, boxing, gymnastics etc. To get that one person winning, there is an army of coaches, physics, nutritionists etc/Sports where it’s a team (and maybe also animals): football, basketball, baseball, relay, polo etc. Also another army of people to guide and support them.In all startups, it’s a team scenario and dynamic. We can’t control what other people do (customers, strategic partners, investors etc). We can only be responsible for doing OUR best work, learning from it, adding compound value to knowhow and things that do work, and then navigating through the vast universe of things we don’t know and things that no one knows.Infinite are the things we humans don’t (yet) know and are on journeys to discover.
great comment. Hope and constant forward iteration sustains everything in life. As long as you are objective about the state of the thing you are trying to get to a better place, and working on the rate of improvement per unit of time, nothing else matters.
Thinking out loud
A similar analogy is from the view of a person’s management style, micro manager vs. delegator. My first statement is a comment. In my experience with not that many VCs, perhaps 6 different firms, all east coast, were not only hands off but absentee. I did however see variation from some big name firms to some podunk firms. I personally liked the hands off VCs because we (the mgmt in both of my startups) generally saw their advice on anything other than financing as interference.My second thing is a question. From my limited time commenting here and on Brad’s blog, you two come off as much more activist. So, from your obviously more broad experience with a larger swath of VCs, what is you take on the percentage of firms that are more activist vs. more hands off, i.e. more operator vs. more investor?
I think Fred and most other successful “non-operator” VCs have developed or intuitively have a skill that I know I didn’t…. gratitude, humility, empathy,I was initially in finance for 15 years and naturally felt that spreadsheets and business plans were “easy” to execute… I was immature and arrogant. Now after 17 of being an operator and gorging on crow and humble pie, I’ve realized it’s not really that “easy”. For me, it was time and experience (maybe like a parent) to learn to shut up and listen, to support first and not judge quickly, to really understand the other person’s position…I think those EQ skills are what really differentiate the best VCs…my 2 cts
“I don’t know exactly why brilliant strategists often make terrible operators but I see it all the time.”It takes more time to learn and grow, and it has a switching – however, if the focus is right and the path is true then the success and outcome will be reflective; the more time you spend on a problem …P.S. I know you’re trying to draw a line for the point of the post, however you are a startup operator and the VC firm is a startup, it’s just that you’re gaining operating experience while growing the company; what other VC firms have tried an experiment like USV.com?
I remember that lesson from that older VC. I remember the shame I felt. It’s an important reminder, even today. I still struggle with it, even though I’m not an investor anymore.
You can’t be ashamed of trying to help people. Because that is what you do Jerry
Short VersionFor an early stage, information technology (IT) VC, the main challenge is to find good ideas for startups, each of which hopefully becomes another Apple.Moore’s law has had a nice run. Even if it continues, now in computing hard/software we are awash in bytes, cycles, high data rates, and low cost or free general purpose software.Moore’s law offered a lot of low fruit opportunities, that is, from just routine application of what Moore’s law offered. and some non-operator early state IT VCs saw some of those opportunities and did well. Still, on average across early stage IT VCs, the financial returns were not very good.We also have a lot of chicken, ground beef, and flour, but not since KFC, McDonald’s, and Pizza Hut have we found any big, new businesses to make use of these ingredients.And similarly for making money with computing: The opportunities from just routine application of what Moore’s law offered have been exploited, and opportunities for “another Apple” are increasingly rare.To have additional valuable applications for computing, we need some powerful, valuable new technical ideas as the basis for new software to make good use of the computing.Each such new idea will be the work of at most only a few persons and, as we know from the history of such work, usually only one person, a solo founder.Moreover, if careful on the work and what software it requires, that solo founder can write the software, bring it to market, and, if successful, quickly get a lifestyle business. Then, if the business can grow to become another Apple, there is plenty of cash for just organic growth, no equity funding needed.Computing is so fundamental — maybe good enough for real intelligence, even superior, real intelligence, and, thus, the automation of essentially all the work to be done — that we don’t believe that the progress of computing is nearly over. So, we will have more, new, powerful, valuable technology for applications of the basic hard/software of computing for applications to do more of the work to be done.To be part of these opportunities, early stage VCs will have to be able to evaluate such new technology.On the question of investor versus operator VCs, for picking the low fruit from Moore’s law, the additional time and focus just on investing by the investor VCs often did better than the additional operational knowledge but less time and focus on investing of the operator VCs.Is this surprising? Not really: As we know well, very rapid growth into a huge market — which is just the case all IT VCs have in mind and need — and, thus, in particular, lots of money, usually solves all operational problems. For the routine applications of what Moore’s law offered, the core technology was essentially just routine software, often in just C++; thus, it was not necessary for any of the VCs to concentrate on the core technology or really much of anything operational.Then there got to be some early stage IT VC rules: (A) Look first for traction, significant and growing rapidly. (B) Next look for a large market where the startup might become a large company. (C) For a Buffett moat, look for some network effects, maybe too high switching costs, a better UI/UX. (D) Look for some early exit opportunities in case have to abandon the hope of another Apple. (E) Look for a team of founders so that the company is not too dependent on just one person and more likely needs equity funding. (F) Look for a team eager to sign a business deal good for the VCs.Lessons from Gulf War IIn considering the roles and importance of strategy, tactics, operations, leadership, etc., we might consider Gulf War I as in Frontline Gulf War I athttps://www.youtube.com/wat…There we get to see a wide range of work in strategy, tactics, operations, etc. E.g., Bush had been a fighter pilot in WWII, and maybe that helped him better understand operations and, as in the video, when Schwarzkopf and Powell told Bush “If you ask us to drive Saddam from Kuwait, this is how we will do it” where the “this” was massive, overwhelming, in numbers of troops, airplanes, tanks, ships, etc. — 6 carrier battle groups, lots more ships, e.g., the battleship Missouri, lots of amphibious forces, essentially all of the heavy armor in NATO defending against the Soviets, refueling aircraft in the air 24 x 7, essentially the full range of aircraft types the USAF had from the new F-117s to the old B-52s, activating the US National Guard and Reserves, etc. Hearing this, right away Bush pushed his chair back and said”You’ve got it. If you need more, come back to me.” That was a very fast decision on a very big and important subject. Here Bush needed some good operational insight.There was a lot on operations; e.g., (A) could air power over Baghdad do enough damage to need no or nearly no ground war in Kuwait; (B) how fast should General Frank’s big left hook go chasing after the Iraqi Republican Guard armor; (C) should ground forces attack directly into the strength of the Iraqi forces in SE Kuwait with predictions of 25-40% Coalition casualties; (D) how effective could air power be in degrading the Iraqi ground forces; (E) how to cross the barriers Saddam had set up blocking invasion from Saudi Arabia, i.e., while working to cross the barriers would be under Iraqi artillery attack; (F) what would casualties be when US armor encountered Iraqi armor; (G) how the heck to handle all the logistics?But there was also strategy; e.g., (A) how to build and maintain the Coalition; (B) how to keep the Soviets from trying to back their client, long time really good customer for Soviet military equipment, Saddam; (C) how to work with the Israelis as Saddam launched Scud missiles toward Israel; (D) what possibilities were there for getting Saddam to leave Kuwait from negotiation; (E) how to keep the US citizens supporting the war; (F) what to say to Saddam to keep him from using WMDs; (G) what did the Coalition want at the peace table at the end, i.e., dump Saddam, defend the Shiite rebels in south Iraq, defend the Kurds in north Iraq?Nearly everyone from General Schwarzkopf up to President Bush had to consider both strategy and operations. And for all of those people, those questions were not all easy: E.g., a little before the Coalition started shooting, US Secretary of Defense during the Viet Nam war Robert McNamara passionately testified to Congress that”It will be bloody. There will be thousands and thousands and thousands of casualties.”Well, at the end, the Coalition suffered less than 300 casualties, and the US, less than 200. There’s rumor that the US suffered more injuries from recreation, e.g., softball, than from enemy action.Usually throughout the war, the casualties were very one-sided, that is, nearly all on the Iraqi side; five examples:(1) E.g., the Iraqis sent two of their divisions (ballpark 15,000 troops per division) in a hurry south to the battle in the little Saudi town Khafji, on the coast of the Persian Gulf, just a little south of Kuwait. Well, while the two divisions were on the way, US air destroyed both of them, essentially 100%, all troops and equipment, quickly, apparently in no more than a few hours. That was ballpark 30,000 dead Iraqis.(2) E.g., in the final hours of the ground campaign, there were some major tank battles with many dozens, maybe hundreds, of Iraqi tanks. In these battles, the US tanks, just as fast as see, aim, fire, destroyed the Iraqi tanks and won the battles with dozens of exploded Iraqi tanks in minutes with no US casualties in one battle and only 1 US casualty in the other battle.(3) E.g., the Iraqi airplanes had a tough time doing much and soon either did not leave the ground or left the ground, flew low, and tried to escape to Iran.(4) E.g., an Iraqi general explained why his artillery didn’t do much to attack the Coalition forces as they entered Iraq and Kuwait, and his answer was that nearly all his artillery pieces had been destroyed by Coalition air.(5) E.g., nearly all the Coalition attacks on Baghdad were from US F-117 stealth fighter-bombers; they had to fly through massive air defenses; not one F-117 was lost or got even a scratch.So, the Coalition had massive successes in the operations; operations are really important; and everyone from Bush down had to think hard about operations.So much for the examples of Gulf War I.Business Startups and VCIMHO to address this issue of strategy versus operations in startups and venture capital, we need to consider some things we have so far neglected:First, where — seed, series A, B, … — is the VC trying to be effective? A guess is that for a VC to be an “operator” becomes less important for the later stages of funding, that is, stages, C, D, … to what a private equity firm might do, KKR M&A,, a hedge fund, a mutual fund, an index fund.But, as we saw in Gulf War I, knowing about being a good operator can be important, at times nearly anywhere from seed … to a mutual fund (maybe not an index fund!). E.g., when it is time to get a new CEO, that person needs to know enough about operations — at least to hire a good COO? — so that the company doesn’t fail from poor operations. Then the people selecting this new CEO also need to know enough about operations — e.g., Bush had to know about operations in Gulf War I.Second, what are the business opportunities for the companies VCs might back? That is, both startups and VCs have to go hunting where the opportunities are. Then both startup founders and VCs have to be informed on those opportunities. To evaluate such opportunities, might want to consider both strategy and operations. E.g., in Gulf War I, understanding the operation of the US F-117 stealth planes, the US means to find and destroy Iraqi radar, the infrared and laser bomb and rocket aiming technology, the gun range, gun stabilization, and infrared targeting of the US tanks were important.Third, on the opportunities, whatever the patterns, summary statistics, etc. are, for VC returns some big wins — another Cisco, Apple, Google, Facebook, Twitter, etc. — are just crucial. These big wins are so different that patterns that are superficial, e.g., easy to see in, say, the WSJ, and effective are too few to matter; net, deeper patterns, insight, analysis, evaluation are crucial.Not for MeI wouldn’t want to be a late stage VC: I’d feel like I was trying to restore old, rusty cars, training horses I knew would never win a Triple Crown, and in general working with someone else’s partial failures.From the above, I wouldn’t want to be an early stage VC either: I would have to depend on the broad range of opportunities and the ideas and efforts of the startup founders and what they brought to me. And all the while I’d be frustrated because I’d clearly understand that I’d be looking for rare, exceptional situations of, say, another Apple but depending on others to make such situations real for me.Instead, if what I needed was another Apple, etc., and as a VC I would, then I’d want to get deeply and directly involved in finding another Apple and not just wait until one arrived in my e-mail in-box and was easy to see was another Apple.Guess about the FutureHere I consider the future of valuable information technology startups, say, another Apple, and associated VC.I have a guess about early stage VC for the next 20 years: For the big wins that are needed, core technology will not be sufficient, but some advanced, original, proprietary, powerful, valuable, crucial core technology will be necessary. E.g., think of the F-117 in Gulf War I.That is, the range of opportunities from just routine applications of existing technology is shrinking; e.g., VCs can’t hope for another Apple by pursuing more local, mobile, social, sharing apps. That is, we are awash in cheap bytes, cycles, high data rates, and general purpose software; the low fruit from Moore’s law is dwindling quickly.As we know from the history of such original work, such necessary technology will tend to be the original work of never more than a few, usually just one, startup founder.Then, due to the situation in computing now with so much hard/software available at relatively low cost or for free, for that founder to write the corresponding software will often be quite feasible and the only feasible approach to getting such technology deployed.Next, if that founder has been careful, with that software written, they can be within months of a nice lifestyle business with plenty of free cash for rapid organic growth to “another Apple”.Then it will be crucial for early stage VCs to be able to do good evaluations of such necessary technology.Net, IMHO, due to the collection of opportunities available, early stage VC will have to change.
Thanks Fred, for this amazing post. As someone who’s learnt lessons on both sides, I’ve pondered this a lot over the last few years.You added the caveat “my generation” a couple of times in your answer — which makes me wonder, would your answer change if you put yourself in the shoes of a young VC today?….in terms of – the increasing need for domain specialization, – the maturity of entrepreneurs today and what they seek, – the abundance of capital globally, the degree of competition, tons of new firms (superangels, micro-VCs, every corporate..)- the democratization of knowledge, networks, etc. (arguably weakening “proprietary” advantages that VC firms used to have)I’d still like to think the three points you mentioned as non-operator VC strengths hold true, but I’m curious as to whether things look fundamentally different for the new generation.
Every time the Company struggled with an issue, Jerry jumped in and tried to help.In business, this is also the curse of being ‘pretty good’ at to many things. As a result you are not able to focus on the most important things. You end up going all over the place putting out fires (that others should be handling). Why? Because you can. And because you are often good enough to not have to rely on outside help or possibly do a better job than the outside help (or employees) that you can afford to hire.That said being able to wear many hats (and wear them at at least a ‘b’ level) is a great thing for a small entrepreneur to have. Comes in handy and while it won’t lead to oversized financial success it will lead to long term stable success. And perhaps security. Old school business (with no VC money) it’s often the only way to go. New school business (startups etc.) probably a big limiting factor.
Appreciated this commentary and your thoughts during MIT Q&A, thanks. The other thought which you’ve shared before relates to the 10,000 hour rule from Outliers: more time investing also makes for more deal experience and more time developing investor acumen and the strategic thinking you were describing above.Thanks for continuing to set an example and share your thoughts.Cheers,Avery
VCs are overly glamorized. The best entrepreneurs don’t become VCs, they become LPs (Marc and Ben are notable exceptions). The vast majority of operator-VCs were either founders of mediocre companies or role players at successful companies. When you are a VC and finance is the only industry you’ve ever worked in, your value to founders is limited.. Can you make great long-term VC returns as a career “finance person”? Sure. But the odds aren’t on your side.
Another point for the list, “exercising patience”.It takes patience for a value investor to wait for the right company to come along that fits the predetermined model. The majority of deals are passed on, which at first can be counterintuitive to an operators mindset.Operators must have a bias towards action. Rally the team, make decisions quickly, and get product launched.
Maybe it’s confirmation bias, but on a similar note, I’ve started to notice a good number of corporate lawyer turned VCs (USV included). Do you think that law practice helps foster that “strategic” and “portfolio-focused” thinking? Or are these VCs the exceptions? And if so, what are some of the ways you’ve seen lawyers’ training or tendencies go contrary to the qualities of a good VC?
Yes. I was taught the VC business by a lawyer turned VC
I have been following your blog for the last few years and benefited from your MBA Mondays section. Would love to hear you elaborate on “guide companies towards a strategy that wins in the market.”
In my humble opinion it’s all comes down to that person/investor abilities to help the founders navigate the “boat” in high waves and in steady water (they don’t come that often:)). It may be because the investor had been there – done that or because he is smart and strategies. At the end it is about what type of a person she/he is and If she/he is there for you when needed with advice, connections and sometime just to brainstorm together. But keep in mind that this is just like marriage – but without the ability to say let’s get divorced so make sure you DD him or her at least as they DD on you and your company.
Interesting thoughts. I disagree howEver with your third point: You aren’t all in on anything but you are all in on all of it. It’s exactly the same thing for an entrepreneur of the course of his startup. Not necessarily at the very same time but he or she is likely to go through it at some stage. Also, the core challenge of an entrepreneur is that he had many hats and figure many things of very different nature, just as you described what a VC does. In the end a VC helps entrepreneurs with their challenges so they are theirs too.
The proven adage that you should “not hire in your own image” holds true for matching VCs/Advisors with Entrepreneurs/Operators. Access to VCs with great instincts, perspective and who ask the right questions can make the difference when dealing with complexity and uncertainty. The best ones do it because they genuinely care and not just because there is some form of monetary opportunity. Great thought-piece, Fred!
I am probably quite wrong about this but I feel the very same difference can (and often should be) found between CEO and COO.A CEO who understands how to manage culture and with a strong grasp of strategy/positioning allied to a killer operator COO, where both recognize the distinctive contributions of the other, is a very powerful team.
Knowing whether one is good at being a VC takes a while. Especially starting as a junior VC, you only get to actually make your own investment after a few years in the industry. Since from that point on it may take a good 7 years to see whether your investment yield good returns, one may find himself over commitment and invested in a profession he (turns out) is not so great at. At which point, one would be over qualified for many positions outside the VC world and very much underqualified for many others. Though there are indications along the way (e.g. whether your companies raise following rounds), this are still not the KPI’s we measure a VC by. The thing is, that unlike the way the market evaluates entrepreneurs, considering often failure as valuable experience, this is an attitude that VC do not enjoy (to the best of my knowledge – correct if I’m wrong). So what would interim milestones you would recommend to evaluate ones potential as an investor?
ok but here’s another quandary for you: VC partners don’t really hire “strategists”. having “consulting, writing” on your resume won’t cut it. so, if you didn’t enter as an analyst in your 20s/30s, you’re too expensive to be one now and your only real option is the operating route. any thoughts on how to solve that one from either side? how do mid-career strategists get into VC? How do VCs find talented strategists?
Great blog and comments. IMO, and I am not a VC (but have built several companies, coached tens of leaderships teams, invested in tens of companies, and sat on tens of boards), there are likely a # of factors at play not the least of which are: 1) VC’s need to be able to confidently look out at least 5 if not 10 years, that ability grows with experience/ age, and few people have the ability to do this well (<2%) (so I agree with the advice about getting experience), 2) 95% of those that meet criteria #1 tend be really strong as either a strategist / visionary / leader or a manager / executioner (this is more “yin yang” than “opposites” in that the person can do both but s/he is much stronger at one versus the other) (another reason to get experience so one can develop a sense whether one is more of a strategist or executioner), 3) many very smart people struggle with getting clear on their “purpose” and as such some VC’s with operating backgrounds may try to jump in and help when, if they were clear on their “purpose”, (build network, advise, help hire, develop an expertise in a particular domain) they wouldn’t go there unless this was their purpose, and 4) I struggle with p/e and v/c models that have an operating component because IMO their job is to help the companies become “fully formed adults” (i.e., build great, stand-alone, leadership teams).
I think “strategy as the opposite of execution” is spot on. It is representative of one of humanity’s great dualisms – mental vs real. Or to use a phrase that I like, from Stephen Covey (7 Habits), “Everything is created twice, first in the mind, then in reality.”Mental — RealStrategy — ExecutionChoice — ImplementationThought — ActionCreative — ProductiveIntuitive — SensingTheory — PracticeIdeas — FactsTheoretical — EmpiricalDoing the right thing — Doing the thing right.etcAn effective startup needs to get both realms right. It’s not just “all execution”, as many say. I mean, if it were “all execution” then why don’t people just “execute” their way to a hit song, a best-seller book, a Nobel prize – or a world app? Because it’s not enough to just do it. Breakthrough products come from breakthrough ideas. And that is mental, strategic, work.Scientist tend to live in the mental world, detached from reality. While sales people tend to live right here, right now, not seldom unappreciative of the enormous mental work behind the great products that they sell. (We all have seen the YouTube snippet of Steve Jobs product people vs sales/marketing people.)The really cool thing with the startup world is how it bridges these two realms. It is theory in practice, ideas in reality. It is executing strategy.