Saturday, May 12, 2012

Response to comments: Training VCs

Many of the comments on yesterday's post were about training future VCs, or not. Both Brad Feld and Fred Wilson said they did not have junior VCs because they did not want to burden entrepreneurs with inexperienced VCs. This makes a ton of sense. But, then, where should experienced VCs come from? Andy Weissman comments that perhaps VCs are best trained by being entrepreneurs.

You either believe that Venture capital is not a profession--i.e. there are no special skills or knowledge needed that can't be picked up as you're doing the job--or it is. If it is then it looks like the best firms are akin to 'boutiques' in other professions. In fact, almost all the firms are akin to boutiques in other professions. Of course, in other professions boutiques are formed by people who were trained at the mainstream firms. If there were no mainstream firms there would be no people to form boutiques.

Law firms train lawyers. Accounting firms train accountants. Banks train bankers. Even advertising agencies train advertising people. VCs by and large do not train VCs. Maybe VC is not something you can learn by just doing VC, although Fred is a prominent counter-example. Professions train professionals partly because they think their professions are important, so they feel the obligation to pass on embedded knowledge to the next generation. And partly because they can skim some of their underlings' earnings (thus the pyramid structure of professional services firms.)

VC does not have the pyramid structure of some professions, like law or accounting, where most tasks can be delegated with oversight to junior people. So it's true that junior people in VC probably would cost more than they generate if they were truly being trained (as opposed to just cold-calling and spreadsheet-jockeying.) But if we care about entrepreneurs, as we all profess to do, we should want not just the best for today's entrepreneurs, but also for tomorrow's.

If you do, and still don't think training VCs is worthwhile, then it must be that you simply do not believe that VCs can be trained, that VC is not in fact a profession at all.

I do not think this is true. The best--in fact almost all--VCs have historically come from one of five places: VC, banking, law, technology firm management, or journalism. Check the VC genealogy to confirm this. (I don't think any journalists are represented there, but Mike Moritz is a prime example.)

Each of these paths teaches people some of the necessary skills to be a venture capitalist, but not all of them. Witness Kleiner's and Perkins' struggles as they started out, making ridiculously wrong bets on markets they did not understand. Or the revealing comment Fred Adler made* about two of his partners that left to start their own fund: "These fellows came out of Citicorp where they were quite senior and they didn't go through [my] intense interrogation" justifying the investments they were making. The implication being that the two partners did not know enough to make good investments and Adler did not feel they would accept his instruction since they were so senior. In other words, being senior at Citicorp had not taught them all they needed to know to make good venture investments. Those two partners must have learned something on Adler's dime though, because the fund they started was Accel**.

Many venture capitalists made similar mistakes early on. The ones that didn't seemed to either have extensive angel investing experience (and so their early mistakes are not part of the record) or they "played the follower strategy" (as Wilson has it) and managed to get into more experienced VC's deals in order to learn the business.

So if specialized knowledge is needed, how to generate it? Kauffman has their Fellows program to train VCs. Andy thinks being an entrepreneur is the best training. I disagree with both. I think only doing the job teaches the job. And since no one wants anyone doing the job who doesn't know the job, this means a long apprenticeship. But the best VCs seem to not be interested in having apprentices. So, then what?

In my opinion, if we want better trained VCs, then either the culture has to change so VCs feel an obligation to train the next generation***, even though it costs them money, or the LPs need to start looking out for their future returns in addition to their present ones and compel VCs to have a bench. It would be interesting to hear from experienced venturers how they learned the business.

* Quoted in John Wilson's The New Venturers.
** Wilson's book was published in 1985, Accel was founded in 1983, so Wilson had no way of knowing that Accel would go on to be one of the premier venture funds. This just makes the quote that much better.
*** I would be happy if VCs would even just blog more with other investors as the audience, instead of writing the same frickin how-to posts for entrepreneurs over and over. The world does not need another "How to Read a Term Sheet" post, it really doesn't. It could, however, use a few more "How You Will Get Screwed if You Write a Bad Term Sheet" posts.


np said...

I'm not an expert in VC, but I think this a fascinating discussion. I couldn't help but jump in:

1) Training VCs sounds really expensive. I once had a mathematics professor who said `the only lessons you truly learn are pain lessons' -- and to an extent I think he's right. I agree with you that doing the job is the best teaching for the job.

Herein is the catch:

If an investor is never allowed to fuck up, how will they learn? If you have too much senior partner oversight then there are no pain lessons.

If an investor is allowed to make lots of mistakes -- how are the LPs going to feel? How are the GPs helping them learn?

Perhaps the answer is to start training off with having investors make smaller, earlier stage investments, and then they work their way up to larger deals? Does that even make sense? I'm not sure -- but there has to be a more cost effective way to train these new professionals than spending millions of LP dollars.

I wasn't entirely sure how much you were suggesting trainee VCs should watch vs act.

2) Being a good venture capitalist is partly picking the right horse to put in the race... but that's only (less than?) half the puzzle. Especially in early stage companies.

VCs love to talk about `adding value' - and while in many cases those claims can be viewed with skepticism, the best investors are clearly great strategists who bring expertise to the boards they sit on.

It seems having prior experience in the complementary career path to VC (entrepreneur) is a sensible prerequisite. Similarly - almost all judges are first lawyers, many detectives are first police, etc.

That isn't to say there doesn't need to be mentorship, apprenticeship or training of new VCs. I don't think it diminishes your central point (that as an industry there should be more training of VCs) to claim prior career experience in startups is all-but-required to be a VC.

Eduardo Fernández said...

Thanks for writing this. As an entrepreneur, I find this discussion fascinating.

Eduardo Fernández said...

Thanks for writing this. As an entrepreneur, I find this discussion fascinating.

Jim Andelman said...

How is training a VC like training a fighter pilot?

They both take 7 years and cost $40mm.

(the idea being that the junior VC learns by making a bunch of investments that turn out poorly)

I've been at it 12 years, and finally feel like I'm getting reasonably good. So much to learn. Thankfully I didn't blow through $40mm. :)