Global Themes

On Globalization & Venture Capital

Entrepreneurs make really bad VCs

Ok…I admit that is an exaggeration…but one of the VC industry’s well-known article of faith is that good VCs must have some entrepreneurial experience in their past lives/careers… (see e.g. one of Guy Kawasaki’s best posts: “The Venture Capital Aptitude Test. Update: pl. see comment below.

The main premise being of course that unless you have been an entrepreneur, you can never understand what it is to be on the other side of the table, you find it hard to empathise with management and you cannot really add value.

Is this really true? While empirical evidence may suggest a strong correlation, it would be wrong to infer a causal relationship based on that.

Why do I say that? Look at John Doerr, arguably one of the most successful VCs in silicon valley (or anywhere else for that matter)…and look at Mike Moritz  (a former journalist with TIME magazine)…On the other hand, I know there is Vinod Khosla…

But that’s really not my point…

Fundamentally, VCs and entrepreneurs are on the opposite sides of the spectrum…while VCs need to act from the “buy” side: cautious/ paranoid/ careful…entrepreneurs would usually be on the sell side: exuberant, wildly optimistic, believing that anything is possible, in a hurry…

So to a certain extent, whether you will be a good VC or a good entrepreneur is “hard-wired”…and it is difficult to be both…

No wonder then that great entrepreneurs rarely make good VCs and great VCs rarely make successful entrepreneurs…

Exceptions? I am sure there are some…Vinod Khosla for instance and of course, Hermann Hauser…but not a large list, I guess…

Right…or wrong?

See also:
Will Price’s comment on this topic and an interview with Larry Sullivan which talks about this but is also very readable – on its own – as it recounts his experiences of managing a global start-up (that got incorporated in 3 countries within 3 weeks!)

Find of the Day: This interview with John Doerr (from 1997) with some timeless advice for entrepreneurs (and VCs); also here

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P.S. Over the coming weekend, I have promised myself to take the VCAT and am contemplating posting the results online (suicidal?)… watch this space.

May 3rd, 2007 Posted by | Entrepreneurship, Venture Capital, What VCs really do | 10 comments

10 Comments »

  1. Spontaneity is an essential element in a VC DNA – that which made Andy Bechtolsheim write the first funding cheque of $100,000 in favor of “Google Inc” a corporation which didn’t yet exist; Legend has it that Andy was getting late for a meeting and preferred it over listening Larry and Sergie out. I would credit it with Andy’s reflexes than to cast it away merely as fortuitous.

    I’ve noticed a few traits in common in great VCs. They invariably recognize that the biggest sin of all is inadvertence. Not being fully awake. The future descends equally on everyone, but some notice it faster because they are always pushing the limits of their knowledge, asking questions and picking up on weak signals. They keep their eyes and ears close to the ground to hear its rumblings, gut it out and react.

    VCs must realize that they are essentially followers (of entrepreneurs’ ideas and risks that come with it) and not leaders. They are not in the business of taking direct risks but in partaking them. VCs from operational background often get confused here. Their business is betting on a team rather than playing in it.

    They have to be willing to place intelligent bets, and give up the smoothness of predictability for the non-linear upsides of intelligent risk taking. Not all bets will lead to success but there’s hardly any safety in passivity either. They need to have the self confidence to set a direction but not the arrogance to fight the need to change if market conditions so require.

    Comment by Krishna | May 3, 2007

  2. Please re-read my blog post. I didn’t say they should be former entrepreneurs (though I think it helps). I said they must have real-world experience in real-world jobs. Being an associate or analyst at a VC firm does not quality.

    Thanks,

    Guy

    Comment by Guy Kawasaki | May 3, 2007

  3. Krishna: Thats a great comment. Thanks.

    Guy, mea culpa. I was wrong in extrapolating.
    I would be very interested to know whether you agree with the dichotomy though…Thanks.

    Comment by Shantanu Bhagwat | May 3, 2007

  4. This is a good site which has started ranking VC DNA and experiences by registered members who can post comments on VC and relavant exposures they may have had.

    Some interesting opinions to read (for members only)i.e. requires registrations but few lines are available for public also.

    Site has yet to be put thru some litmus tests!!

    ~Loken

    Comment by Loken | May 5, 2007

  5. http://www.thefunded.com/

    appending site name for previous thread.

    Comment by Loken | May 5, 2007

  6. Shantanu

    Giving some thought to this yesterday, if entrepreneurs make bad VCs, then the real question is “Who makes good VCs?”.

    At the risk of sounding stupid- I think experienced VCs make the best VCs. Even John Doerr has said that you have to lose $20 million before you know what you’re doing.

    I’m a big believer in operational experience prior to being a VC, but it’s not sine qua non for being successful. The examples above demonstrate that. (plus, a $20 million education can’t hurt)

    Comment by Jason Ball | May 5, 2007

  7. Jason,

    *Who makes good VCs?*

    To a Limited Partner, it’s the one who has returned consistently fabulous IRR.

    To a founder, it’s the one who got them out of trouble and put them back on track.

    To a VC firm, it’s the one who’s performance lets them raise the management fee and carry with each successful exit and the one who puts them in a position to choose their investors and dictate terms of longer lock-in and larger ticket size.

    Comment by Krishna | May 5, 2007

  8. Loken: I will have a look at the site. Thanks.

    Jason: Thats a thoughtful comment and I think has more than a grain of truth in it..not at all stupid.

    Krishna: Thats a nice summary and difficult to argue with.

    Comment by Shantanu Bhagwat | May 6, 2007

  9. So what was the score, Shantanu? 🙂

    Comment by Shefaly Yogendra | May 7, 2007

  10. Do entrepeneurs make good VCs ?…

    Trackback by Fred Destin | May 8, 2007

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