In a prior post about what it’s like to be a VC I made the claim that even if an investor has operating experience, that experience gets stale after a few years.
This led to the following question in my comments:
“You mention that operational skills begin to decline 2 years into the job. If this is true, then it follows that VC GPs can only add limited operational value.”
I have lots of thoughts on this, so I thought I’d expand with a full post. I think this is an interesting question, because it seems to defy the logic (or conventional wisdom) that a VC with more operating experience should be better suited to help entrepreneurs. Couple observations.
First, consider the many counter-examples. Fred Wilson (Twitter, Zynga, Foursquare) has been a VC for almost his entire career. Danny Rimer (Skype, Tellme, Stardoll) started out as an equity analyst. Nick Beim (Gilt, The Ladders, JBoss) was a consultant and investment banker. Some of the legends of the business are so far removed from their operating days that it’s probably a real long shot to say that they bring direct operating experience informed by their prior roles. I think you’d be hard pressed to find too many entrepreneurs that have worked with these investors who don’t think they’ve been extremely value-added and have helped on strategic, operating decisions that they have faced.
So, why are non-operators well equipped to help? I think the difference is their longitudinal view of many companies vs. the more narrow (but deeper) view that an entrepreneur has in one company. A non-operator may not be well equipped to advise you on how to build a product, but she may be very well equipped to advise you on how to build your product TEAM or how to MEASURE your product progress based on what she has seen across many companies. An investor with lots of experience will also have much more pattern recognition when it comes to some of the challenges that an entrepreneur may only face once or twice in a company’s life. The simplest example is negotiating future financings (assuming you and your investor are relatively well aligned). But there is also negotiating a sale, letting go of a co-founder, switching business models, rapidly scaling or rapidly cutting costs, etc.
Former operators on the other hand have an advantage in other ways. They may have deeper relationships within their industry (although a non-operator may have broader relationships in tangential industries). They may have more conviction around product or technical decisions, hiring, or even organizational structure. And there is probably a higher degree of empathy for the challenges of being an entrepreneur and founder that might make the former operator a better advisor and confidant. But I think the further one gets from actually operating, the more stale one gets as well. You wouldn’t necessarily want someone who was an executive at Excite to tell you how to develop your advertising product because the learnings are so stale and context so different. In fact, a non-operator may actually have more industry insight than a veteran of that industry because he has deep conviction about an investment theme and can draw from lessons learned from multiple companies within that theme. The folks at Foundry and IA come to mind, although I think this is true for many investors that are more thematic or thesis driven.
So, over time, I think a former operator starts adding value to companies in pretty much the same way that the non-operator does. That is, based less on their deep entrepreneurial experience, and more from their longitudinal view over many companies over different periods of time. I don’t think this is a bad thing – hopefully I’ve shown that non-operators can obviously be immensely helpful, but usually not in the normal “operational” sense.
Often, I will counsel entrepreneurs that we invest in to bring in a couple angels that are active entrepreneurs in or around their space. I think it’s a great benefit to have an informal (or even formal) CEO coach, and there are other unique things that a current industry insider can easily bring. A few examples from our portfolio:
- Boundless Learning: John Katzman (Founder of Princeton Review and 2Tor)
- GrabCAD: John MecEleny (former CEO of SolidWorks)
- Shareaholic: Stephano Kim (President of GraphEffect), Brian Shin (Visible Measures)
- Insight Squared: Steve Papa (Endeca) and Mike McDerment (Freshbooks)
But ultimately, advisors are just advisors. They are great to leverage, but can only do so much. Same thing with investors, even if they do bring deep, operational expertise. After all, as I often hear VC’s say, “if I’m the one designing your product/marketing plan/technology stack/etc, then we have a big big problem.”
Disclaimer: Although I hold these views, I still intentionally looked to start NextView with two other partners who each have operating and entrepreneurial experience. Go figure