Wednesday, February 10, 2010

Prepping for a meeting with someone who wants to become a VC

Like pretty much everyone else on earth, it took only a few months at my first full-time job to convince me that what I had always thought I wanted to do was not what I wanted to do for even one more day. So I went and talked to a ton of people about careers and eventually landed in the living room of an accomplished venture capitalist.

This, I decided, was the perfect job. How, I asked him, do I get to be a venture capitalist? His advice: either start and run or have a senior operational role at a successful company and, after you retire in your 50s use your extensive experience and network to pick winners and assist young founders.

There are great investors who did not follow this path, but they give that advice regardless. I also did not follow that path, but it's the advice I would give, if I gave advice on becoming a venture capitalist.

But when asked, I generally go a different route: why do you want to be a venture capitalist at all? I believe that getting the financing of innovation right is one of the primary institutional drivers of societal wealth creation. And I believe that venture capital is how that is best done right now. But VCs are, at the core of it, allocators of capital. Nothing more.

It's understandable that an entrepreneur who gets grilled by a VC might think "I wish I was on that side of the table," but this can't really account for the entrepreneurs' fascination with VC (no one leaves a meeting with their mortgage provider thinking this, for instance.) Maybe many of the people who want to be venture capitalists have fallen for the grass is always greener fallacy: things we know little about seem more appealing than those we know intimately. So let's dispel some myths.

1. I will get to build great companies.

No, the entrepreneurs build the companies. If you find yourself building the company, you've invested in the wrong entrepreneur. Venture capitalists should not manage companies, they should manage investments. One of my hard-learned rules of thumb is that if in the process of looking at a potential investment I find myself having ideas for the company other than those of the founder, I am the wrong investor for the company and the company is the wrong investment for me.

Like other financial intermediaries, VCs need to be in the flow of information to do their jobs well. Using this information to help the entrepreneurs--for hiring, introductions, pricing/market knowledge, etc.--is a useful and expected part of what the VC does. VCs tend to have far more experience in the investment and exit processes, and good ones will help the entrepreneurs understand and execute these. VCs also have seen plenty of success and failure, so can offer advice on management. These are ways the VCs can help entrepreneurs; but none of them even approach "building" the company.

Because the companies I've invested in have created not only thousands of jobs, but thousands of good jobs, I feel like I'm a productive member of society. But I never make the mistake of believing that I've been the primary driver of that job creation: the entrepreneur is.

2. I will get to shape the future.

No, not really. VCs are reactive, don't let them convince you otherwise. The legendary Michael Moritz wisely notes "I rarely think about big themes. The business is like bird spotting. I don't try to pick out the flock. Each one is different and I try to find an interestingly complected bird in a flock rather than try to make an observation about an entire flock." VCs don't decide which companies get started, entrepreneurs do. VCs just decide which of these to fund. In this sense, VCs no more shape the future of their industries than mortgage bankers shape the future of real estate development. Influence? Yes. Shape? No.

3. I will be in the know.

I talk to dozens of people in the industry every week. I sit on boards of companies. I advise companies. But there's no way I know half as much about any specific thing about my very narrowly defined industry (interactive ad tech) as any entrepreneur I talk to. I know a little bit about a lot of things, all of it told to me by people with a big stake in making me believe what they believe. This makes most of the information suspect. It also means that I don't see opportunities as quickly as people inside companies, who deal with the day-to-day frustrations (great companies are most often founded in response to everyday problems.) Better to be a consultant for this.

4. I will be respected.

Actually, no one will know what to make of you. There are so few venture capitalists in the world that--outside of the small pond of the entrepreneurial sector--no one will know what the hell you're talking about. Fred Wilson says in a Fast Company article "when I go out to dinner with my wife and another couple or two [in New York] and I talk about the things that we're investing in, people just look at me like I'm crazy." You want respect, recognition? Become a doctor.

5. I will be powerful.

Really? That's why you want to be a VC? To lord it over as-yet-unfinanced start-ups? Oh dear.

6. I will make a lot of money.

Check out the Forbes 400. First check out the Finance & Investments section. Lots of hedge fund operators and a bunch of LBO types. Even a couple of PE folk. Even, maybe, one who is sympathetic to early-stage tech (Jonathan Nelson of Providence Equity Partners.) Then, over on the Technology & Medicine list (Forbes doesn't even consider VCs financiers!) are the few VCs: Ram Shriram (#272), John Doerr (#277), Michael Moritz (#277) and Vinod Khosla (#347). The most successful and senior venture investors of our time can't even crack the top 250. Vinod Khosla, who's a frickin genius, is barely on the list. On the other hand, there are plenty of young hedgies way up there.

More positively, the vast majority of people on the tech list are entrepreneurs. If you want to make real money, become an entrepreneur. If you're not an entrepreneur, go work for a hedge fund (added bonus: getting a job at a hedge fund is easier than getting hired as a VC.)

7. Okay, I will make good money without taking a huge amount of risk.

Institutional venture capital does pay well. And if you're successful, very well. Probably, all else being equal, it pays as well as being an investment banker. But when it comes to risk, the bargain is not so good. If you don't make the big-time as an investment banker, you can fail gracefully into a CFO spot or move to an advisory boutique. In either case, you get to keep your membership at the country club. If you fail as a VC, you get to move into a VP spot at a startup. There's nothing wrong with that, but the surety of making enough to pay the mortgage payments on a $1mm home is not there.

8. It looks like fun.

It is fun, mostly. I'll give you that.


So, my advice: if you're an entrepreneur, be an entrepreneur. If you're not, then go work for a startup. Or, if fame, fortune and the respect and/or awe of others is important to you, be an investment banker or lawyer or doctor or consultant. Really, deciding to be a venture investor is an entirely irrational choice.

Of course, it's what I do, so who am I to say?

I think there are very good reasons to choose venture capital as a career, but they tend to be softer, more complicated reasons than those I hear from people who say they want to be VCs. If you can articulate those reasons after reading the above, then maybe it's worth exploring.

1 comment:

Sam said...

great thoughts! It's so true that "VCs are, at the core of it, allocators of capital" -- it's a hard lesson I have learned, especially at the earliest stages where coaching and other intangibles can be just as valuable as another $100k. I am now extremely biased to working with angels (personal funds being used) until the business can dictate working with the right VC and taking capital used to scale the business model, not find one.