I recently had the pleasure of speaking with Steve Blank, author of Four Steps To The Epiphany, Stanford Professor and noted entrepreneur. Steve was very generous with his time, allowing us to cover a variety of topics during our Skype conversation. The subject discussed in the video below is Steve’s belief that Venture Capitalists should begin their careers as operational entrepreneurs.
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You can watch my interview with Steve below or on YouTube here: http://youtu.be/VV84vFfN85U
During the fall of 2011, Steve wrote a controversial post entitled, Why VCs Should Be Startup CEOs. If you have not yet read it, take a moment to do so now. It is a brief and worthy read.
Steve identifies the following skills as necessary for success as a venture capitalist:
- People skills (ability to recognize patterns of success in individuals and teams)
- People skills <again>
- People skills <and again>
- Market/technology acuity (patterns of success, domain expertise)
- Rolodex/deal flow (deal sourcing/ability to make connections for the portfolio)
- Board skills (Startup coaching, mentoring, strategy, operational/growth)
- Fundraising skills
Steve annotates his list by stating that:
Some of these skills are learned in school (finance), some are innate aptitudes (people skills), some are learned pattern recognition skills (shadowing experienced partners, hard won success and failures of their own), and some are learned by having operating experience. But none of them are substitutes for having started and run a company.
Interestingly, even the non-people skills on Steve’s list are highly dependent on a person’s interpersonal capabilities. Raising money, managing a Board and establishing a strong Rolodex are all facilitated by an ability to effectively empathize and communicate.
CEO Or Nothing?
Steve’s article struck a particular chord with me. Although my career includes over 15-years of startup operational experience and I was responsible for nearly every role at my various startups, I never held the CEO title. As such, I was curious if Steve felt that a venture capitalist had to be a former CEO in order to be optimally effective or if he gave equal consideration to the merit of other senior executive roles. His response was interesting. “The post wasn’t meant to be dogmatic. It was just an observation of what I’ve seen, about young VCs in particular and the length of time it takes them to actually understand what it is they are doing. Most of them pick it up fairly quickly… but some of them spend their whole careers never understanding what business they are in and think of it as a financial asset class.”
Steve goes on to note that Chuck Eesley, one of his Stanford compatriots, has performed quantitative studies of the VC industry, finding that firms which have operationally experienced partners tend to generate superior financial results.
Yet, even though Steve acknowledges that all senior operating roles at a startup facilitate a venture capitalist’s ability to succeed, he concludes his remarks by underscoring the significant distinction between his first-hand experiences as a VP and as a CEO.
“…in my eight startups, I was CEO and Founder once, meaning the buck stopped with me unequivocally…the role of the CEO is so different than the role of an operating exec, they’re not even on the same planet. I had been a VP of Marketing a couple of times in a startup…but until you are the CEO having the Board yelling at you in one ear and running out of money… and the Engineering VP just quit, you don’t have a clue about what it is like running a company until the buck all stops with you. So I wanted to distinguish running the company from the other jobs at a startup.”
Relevancy Is Relevant
Few people will argue that operational experience is an unimportant component to becoming an effective venture capitalist. However, the relative value of such experience diminishes considerably as the investment domain diverges from the investor’s area of operational expertise.
For instance, while discussing this topic, a venture capitalist (who asked to remain anonymous) recently shared the following: “I once had a life sciences guy, a brainy medical academic, on the board of a tech company. He was worse than useless as his frame of reference seldom synced up with my portfolio company. He kept trying to use a screwdriver as a hammer.” Similarly, a former CEO of a Big Dumb Company might be ill suited to invest in lean startups. Operational experience is additive, but its relative impact is predicated on how germane it is to the investor’s area(s) of focus.
The Alchemy Of A Great Venture Capitalist
Steve notes that venture capital is still a “craft industry” and thus there are a variety of career paths which lead to Venture Partner. According to Steve, “If I had to come up with an academic-specific view of how to build great venture capitalists, it was hire people… to be an Analyst out of engineering or MBA school. Let them…understand how to analyze deals. Throw them out and make them be product managers or something in a startup to get a feel of a company.
If they are still interested in venture, have them come back as an associate and have them shadow deals, shadow board meetings…and then my radical suggestion was to throw them out again. Let them Found a company or at least be a Co-Founder of a company. None of that guarantees a successful VC with great pattern recognition skills…but it certainly would give them a career path that understands both the venture side and the startup side.”
1 Dose Of Depth + 1 Dose Of Breadth > 2.5
I shared with Steve that Rincon Venture Partners has benefitted from a blend of operational and traditional investment banking and venture capital experience. As an operating executive, I developed deep understanding of the strategic and tactical drivers of success in the worlds of robotics, medical devices, SaaS and Ad-tech.
Before I began my VC career, I was convinced my practical experiences were an adequate primer to success as an institutional investor. In reality, I did not know what I did not know. After partnering with Jim Andelman, Rincon’s Co-Founder, I realized that operational startup experience is only one piece of the VC puzzle. Consulting, banking and venture capital experiences result in exposure to numerous, disparate situations and therefore familiarity with more permutations than are seen by the typical operating executive.
Our portfolio companies benefit from the fact that Jim has participated in well over a hundred financing transactions and dozens of exits. This breadth of experience facilitates deal benchmarking. Knowing what is feasible and typical in a variety of situations, enables our founders to efficiently seek resolutions in the midst of competing and seemingly conflicting requirements. The ability to craft a complementary syndicate, utilizing terms which protect everyone’s interests, is not typically part of a startup operator’s skill set.
The ideal venture capitalist does not exist. As such, entrepreneurs are well served to partner with a venture firm that has a complementary Core Team comprised of operational and finance oriented Partners. Assuming the Partners are not strictly relegated to only working with particular portfolio companies, such entrepreneurs can benefit from deep operational expertise while also leveraging a broad library of transactional experiences.