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So you want to be a VC?: A look behind the curtain.

Posted on May 20, 2008

Matt McCall pulled together a pretty interesting post on his blog VC Confidential the other day based on a 2005 NY Times article entitled “So You Want to be a Venture Capitalist” by Gary Rivlin.

As someone who has recently entered the world of venture capital I was interested to see what Rivlin had to say and luckily Matt had pulled all the salient points together in his post (The guy is working me pretty hard so reading a whole article is tough these days… I thought VC was supposed to be a cushy job!).

Turns out that there is a lot of turnover at VC firms (70%+ at some of the top firms over an 8 year period from 1997 - 2005) for various reasons but it seems that a lot of times it is due to lackluster performance. Looks like VC is a true meritocracy - just like entrepreneurship - as it should be.

It also takes a while to see a new VC through to the “go/no go” stage.

It is a mentoring business with a long gestation period…”probably 6-8 years and you should be prepared for losses of about $20 million (per person)”.

I had heard these numbers before so this wasn’t shocking to me. That said, I did make sure that I joined a firm where I was going to be able to obtain a lot of mentoring. If you are looking to join a firm ask them if they will be able to spare time for mentoring. If they can’t you should consider learning elsewhere. VC is an apprenticeship business, no question.

Success in VC, as most people probably know/guess, is mainly due to VCs ability to judge people and their keen sense for market inflection points. This quote from NEA founder Dick Kramlich sums that point up nicely:

…it’s more about people skills and the ability to assess whether there’s a market for something.

This is perhaps why the transition from entrepreneur to VC can be a tough one. After all when you invest in a company you aren’t going to operate it since that is what the operators/founders are there for. Operational experience will no doubt allow you to give the portfolio company solid and informed guidance but in the end you aren’t the one jumping into the day to day management.

As a VC you need to be able to asses the people, the technology and the market as well as recognize patterns. I would also argue that the people part is very important. A lot of top VCs agree with that sentiment including the founder of the very first institutional VC fund, Georges Doriot, who always said that a Grade A person with a Grade B idea will win over the Grade B person with the Grade A idea any day of the week. I subscribe to that completely. As with most things it always comes down to the people.

I would love to get my hands on some data in 5 - 10 years to see how well the “entrepreneur VCs” did compared to the folks who haven’t operated. With the current trend being to turn successful entrepreneurs into VC I think there will be some interesting data to look at (Noam - how about this for a subject matter on the next paper we team up to write?). It would be nice to have some hard numbers to back-up the anecdotal evidence Rivlin brings up in his article like this snippet:

“Most of us learned the hard way that venture investing is best left to the professionals,” said Marc Andreessen, the co-founder of Netscape Communications.

Shortly after America Online paid $4 billion to buy Netscape, Mr. Andreessen helped bankroll a venture firm called 12 Entrepreneuring, a short-lived partnership forged in early 2000 by Benchmark and a pair of successful Internet entrepreneurs, Halsey M. Minor and Eric Greenberg. But 12 Entrepreneuring ceased operations only 18 months after it started, and the partners, including Mr. Andreessen, lost nearly two-thirds of the money they had invested.

Of course that is only one case and I should point out that there are a number of great entrepreneur-cum-VCs around like Brad Feld. The point I am making is simply that success any given related thing - whether it be entrepreneurship or something else - doesn’t mean you will be a great VC.

“I think what a lot of these guys [i.e. people who jumped into VC in the late 90s] learned, some the hard way, is that you’re a natural athlete or you’re not,” said Sanford Robertson, the co-founder and former chairman of the investment bank Robertson, Stephens & Company, who has been investing in venture funds for more than 20 years. “Some can do it, and some can’t, and like with athletes there’s no way of telling until they take the field.”

It looks like you either get it or you don’t. It is a natural ability to asses people and their technology/business. Wow, for someone new to the business that’s a pretty interesting - and heavy - tidbit. I’d like to think I have a good (albeit naive at this point) sense for this business but time will tell.

I will leave you with a tidbit about the background of one of the most famous VCs in the world, Mike Moritz. Moritz proves there is no obvious background for a great VC. He was a business journalist and writer for Time before he joined Sequoia in 1986 (although he did hold an M.B.A.).

Side note: I have been meaning to put up my personal reflections on my first few months in VC. Those are coming soon. Stay tuned.

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