Do Venture Capitalists Suck?

Dave McClure, formerly with PayPal now at 500StartUps, posted a great article this past week he titled, “Scaling Venture Capital. We suck. We can do better.” I encourage you to read it.

Dave makes two points. The first point is that most venture capitalists are hypocrites. They expect entrepreneurs to build large, global companies while they as venture capitalists have never personally held an operational role nor built and scaled a large, global successful company.

I think it is this issue that tends to cause a lot of friction between entrepreneurs and venture capitalists and it is this point I am going to focus on here.

Whether they admit it publically, most entrepreneurs look at vc’s as a necessary evil – the vc’s have the money entrepreneurs need to launch their business and in order to get it, entrepreneurs are obliged to put up with someone who is going to meddle with their business – or even take it away from them.

A classic example of how this “meddling” manifests itself is when the company is hiring its executive team. As part of this process, most venture capitalists want to meet with and interview the candidates – many of these same venture capitalists have never held an operational role or maybe they have held an operational role but they were only an individual contributor.

We vc’s expect the VPs of our portfolio companies to have years of experience and to demonstrate significant expertise in their field. Yet, we don’t apply the same criteria for ourselves. Do we really think we have learned enough about an executive operational position sitting in board meetings to actually “interview” candidates – as if we have the domain expertise to hold and perform their job?

Should we meet the candidates and sell them on why we invested in the company and why they should join? Yes, absolutely! Interview them for their operational expertise? Sorry, but for most of us, I would say we aren’t qualified and if we had any sense we would willingly turn that job over to other people who are experts in that role; people who we trust to do the interview on our behalf.

When I first decided to flip from the operating side to the investing side, I thought that my operating background would give me an advantage as an investor.

After all, I had run engineering, products, marketing, sales, alliances and finance functions in companies that ranged from pre revenue to $2B+. And, over the course of my operational career I had been an individual contributor, manager, director and senior executive working for some of the most successful entreprenuers and companies in Silicon Valley – Apple, Oracle and Siebel.

However, I have found that while my prior operational  experience has been useful at various times and some entrepreneurs have even “valued” my input, I have also made the mistake of making some of our best portfolio CEOs angry with me by “offering” unwanted, unwelcome and/or irrelevant advice – what I have come to call practicing “drive by” management.

If a venture capitalist is to be of much operational value to an entrepreneur, I think we should have personally held or managed a variety of different operating roles – engineering, products, marketing, sales – in a variety of different stage companies. We need to have been an individual contributor, a manager and a senior executive to really understand what it took to make those companies successful.

Each phase/stage of a company requires a different set of skills.

If the only operational roles we have held were in large established companies, we have no personal experience with what those companies faced when there were only a few people in them. If we were an individual contributor inside a start up that became a big success, we may not have been privy to many of the issues the senior executive team faced in the early days.

If we have years of experience on the operating side in a variety of roles, we need to be willing to adapt and throw everything we know out the window because the things we experienced “way back then” are different than the things that are going on now (e.g. social media, mobile, etc.). Different time and different place. We have to be open to and want to continuously learn.

Finally, even if you have all of these “requisite” operational skills and background, the one thing I have found consistent across start ups is that the best teams really don’t want your operational advice – or at least they only want it when they ask for it — not when you may think they need it. They have their own point of view on what needs to get done and, quite frankly, they are in a much better position than their investors to understand the issues in front of them.

I personally know many venture capitalists who have made fantastic investments in superb entrepreneurs yet have never held an operational role. And, the fact they haven’t held operational positions doesn’t mean they aren’t highly sought after by enterpreneurs.

These investors have built great “personal brands” due to their uncanny ability to spot companies and teams that become winners- if an entrepreneur can can get them to invest in their company it carries social status among their peers. Everyone wants to be associated with great brands, personal or otherwise. Not all the great investors may have operational expertise but they seem to find a way to identify those who do – or can learn – and they then apply a light touch when it comes to the actual management of the company.

I agree with Dave McClure, as an industry, the venture capital community should strive to do better. I think we should have more investors who started out on the operational side and built large, global and successful companies — at least we will then have the credibility and experience to provide guidance – when asked.

However, once we’ve made an investment, I have come to learn that it is important we are prepared to get out of the way and let the team we bet on call the shots – this has been one of the more difficult elements of my transformation. After all, great operational executives lead…they don’t follow…at least not for long.

I think I meet Dave’s test for operational expertise but even with all that background, I know I am definitely still learning how to be a good venture capitalist.

  • http://www.wehelpyourock.com/ Mike Walsh

    Great post Bruce! – an open, honest and informative perspective.

  • Domingo

    Bruce, very good observations. I think that the best value VC brings is the money and the connections (to help hiring, to put in touch with potential customers, to help raising more money, etc). Regarding operating the company it’s a fine balance. Some help and advise to the management team based on previous experiences helps. However, when it goes too far into running the company it becomes unhealthy.
    Also, having VC board members who just attend a board meeting every 4-8 weeks is of no value… and I have been in several companies where this was the default case.

  • http://twitter.com/INISMOcom INISMO

    I always differ between angel investors for early stage investments and VCs for later stage investments. If you need advice, start networking and looking for team enhancements to get your business off the ground, the VC is the wrong responsibility. VCs give your the capital to expand to new markets, create horizontal or vertical product- or service diversifications, etc.
    As an entrepreneur, have a look at their investment profiles before contacting them, not to waste your and their time.

  • http://www.totango.com Guy Nirpaz

    Great post Bruce!

  • http://twitter.com/jeffdm63 Jeffrey Mershon

    Steve Blank also wrote about this general theme this past November: http://steveblank.com/2011/11/01/steel-in-their-eyes-why-vc%E2%80%99s-should-be-startup-ceo%E2%80%99s/