What Makes A Great VC?

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What Makes A Great VC?

Brad has a great post describing the debunking of his theory that it's operating experience that makes for a great VC. Brad is a great VC, but its not exclusively because of his operating experience.

I like the pattern matching concept Brad's limited partner talked about. I agree that being able to recognize patterns is a very key skill.

But in my opinion its a combination of experience, passion, honesty, integrity, leadership, and smarts that makes a great VC. These are pretty much the same things that it takes to make a great business person in any industry.

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Tracked on Jun 16, 2004 11:13:31 AM

Posted June 16, 2004 in Venture Capital and Technology

Comments

It does not suprise me that there is little correlation between a VC's operating expereince and their success as a VC. Investing and operating are very different disciplines. The relative value of either type of experience depends on the specific investment opportunity and the environment in which the company is operating? If the key risks the company faces are execution risks, operating experience is going to be very helpful. If the risks are technical or financial, operating experience is less helpful. If the external environment is relatively stable, the "pattern recognition" derived from operating experience will help manage execution risk. If the environment is less stable, as I would argue it is today, then a different kind of "pattern recognition" is more important. That is the ability to anticipate the evolution of markets. In my experience, many operators are great because of their ability to put their heads down and drive an organization towards a clearcut set of goals. Those same people sometimes have a very hard time dealing with the uncertainty of a end market in the midst of substantial change. Some investors, on the other hand, who have worked with many companies, in many market environments over time have a better sense of how to capitalize on the changes in the market.

So is operating experience more valuable than investment experience? It depends.

Posted by: Brad | Jun 16, 2004 11:47:21 AM

I have heard that comment from Limited partners before as well. Actually the follow up to it when you ask them what does coorelate, is that the only factor that has been shown to coorelate is partnership stability. Do the partners get along over the long term. Is there a sucession plan. How does the partnership deal with disagreements over time? That makes sense to me. VC business is a partnership among smart people. It is hard to get them to agree. It is hard to get us to do impartial self evaluations of performance. If a VC does a good job of these things over time, his performance will reflect it.

Posted by: Martin Tobias | Jun 16, 2004 2:20:41 PM

I really enjoy your blog. Wondering if I could ask you a question: Given your role as a VC what are your thoughts on the amount of capital required to build a software business? Obviously, it depends but wondering if you have any rule of thumb.

Posted by: Travis | Jun 17, 2004 12:15:50 PM

I agree completely that in my anecdotal experience, operating skills does not correlate to VC returns. Brad's post of "it depends on the types of risks a company faces", I agree with. But I would also add another dimension to the analysis: is the person more of a "seller" or a "buyer". I've seen a lot of great early-stage entrepreneurs be terrible VCs because they have experienced so much success at selling their ideas to others that they can't switch it around and be critical "buyers/evaluators" of other people's ideas. I haven't seen it as much, but I suspect the reverse to be true that later-stage operating executives, primarily from non-selling roles like COO / CFO, are too heavily weighted toward the buyer mentality and do not have enough of the seller skills. VCs need to be both buyers and sellers at the same time, often in the same meetings, both pre- and post-investment. Pre-investment, to get access to the best deal flow you need to sell yourself to the great entrepreneurs who have lots of financing options, but you also need to critically evaluate the business concepts...at the same time that you are selling yourself. Post-investment, you need to be a constructively critical board member, but you also need to build and maintain the trust and respect of the operating team or else they might start tuning you out.

So if in their previous life an operating executive was too focused on either selling or buying and didn't develop a good balance between the two, that person might have trouble being a good VC. The same is true for any other person, regardless of whether they are an ex-operator....and while there are many factors involved in a person being a good VC, I guess this one factor contributes to the conclusion that there is no single background that is predictive of success as a VC.

Posted by: Dan Malven | Jun 17, 2004 1:36:04 PM

One of the best ways I can think of to describe "What Makes a Great VC" is from a story line from an old episode of the TV show "Taxi" (I guess they are all old episodes, now???). Louie was describing that everybody has at least one thing...Alex had smarts, Tony had brawn, Jeff(the actor?) had looks, Marilu Henner's character had "ta-ta's"...but Louie didn't have anything...other than the ability to unerringly see what everybody else had. Louie would make a great VC.

Posted by: Dan Malven | Jun 17, 2004 1:44:26 PM

not too sound weird or anything...but maybe we're all wrong on the topic of what makes a good VC (*I don't have an opinion though, I'm just interpreting research)

as far as fund management goes, most people will know that at least 10 peer reviewed papers have proven that fund managers are no better at picking stocks than a set of blind folded orangutans with a dartboard

in other words, randomness plays a much larger role in the business of picking winning investments than one would think...and when somebody does have a great track record, findings show that out of a large sample pool (like 2000 VC's) a statistical outlier is completely normal and to be expected- no special abilities- just a normal bell curve

so to that extent...in the same way that it's pointless to ponder about what makes a great fund manager, is there a point in discussing what determines supernormal VC performance?

is venture capital a game of skill or chance? and if it's both, what matters more?

Posted by: Daniel Nerezov | Jul 26, 2005 11:35:19 AM

A VC

Musings of a VC in NYC