My idle thoughts on tech startups
Crossing the other chasm – VCs as entrepreneurs (and vice versa)
There was an amusing article last Friday in the SJ Mercury News about former venture capitalists who are trying their hand as entrepreneurs. The article notes how surprised many of the VCs are at various aspects of working in a startup. As someone who’s gone in the other direction, from operating roles in a couple startups to a venture investor, I’ve been struck by just how different some of my prior expectations were from my current view of the reality.
As an entrepreneur, you sometimes envision the life of a VC as cushy one and are perhaps envious of shorter hours, greater organizational resources, or diversification of risk. There are elements that are certainly true… I still work pretty hard in absolute terms, but relative to my first year at PayPal when I ate dinner with my wife literally 3-4 times per month there’s no comparison. For me it’s not a matter of better or worse, I loved being an entrepreneur and I’m thoroughly enjoying life as a VC. But there are a few things I’ve come to learn about the life of a VC now that I’ve been at it just shy of two years… certainly things I had less understanding of or appreciation for as an entrepreneur.
When I chat with entrepreneur friends who’ve not worked as venture investors, or VCs who’ve never been in startups, I usually use the analogy of the circus performer trying to spin a bunch of dinner plates simultaneously to highlight differences in work style. It’s been my experience that the most successful entrepreneurs are the ones who quickly and accurately determine which one or two of the dozen plates really matters, and then focus all of their energy spinning that one (or two, but almost never more than that) as fast as humanly possible.
As a VC, there are obviously times when you’ll be more focused on a subset of plates but in general the challenge is to keep all of them spinning at the same time without letting any of them drop and break. This can be a bit trickier than it sounds… as an entrepreneur I had the “focus” mantra pounded into my head, first by some great mentors and later as a matter of self discipline. As a venture investor it has taken me a little time to get used to rapidly and dramatically changing gears. You can literally go from a evaluating an early-stage internet deal to a board meeting of late-stage software company already in the portfolio that might be going thru M&A or raising a new round in a matter of minutes. One has to become adept at this shifting of concentration at a macro level (company, sector, stage, etc) while still keeping all those plates in the air.
When you’re a cash-strapped entrepreneur pitching VCs, who seemingly write 7 or even 8 figure checks on a whim, you sometimes imagine that VCs are sitting on top of an immense pile of money and forget about their fundraising process. Of course you know intuitively that VCs have to periodically go out and ask for large sums of capital from institutional investors, but as an entrepreneur I never really understood what that was like.
Now that I’ve been involved with both raising money as a startup and as a venture firm I see some of the differences. PJC is a younger though growing firm (the lingo in the institutional investor world is “emerging manager”), and raising Fund II (as we did this year) and raising Fund X are obviously different sorts of endeavors, but some generic lessons apply to all VCs. In both startup fundraising and VC fundraising, you usually have to make a lot of pitches to close your targeted amount but as an entrepreneur you can still succeed with a fairly low hit rate… most startup equity rounds have no more than 1-2 new investors. As a VC, it can take dozens of corporations, pension funds, fund of funds, high net worth families, and others to round out your LP base even if you have a large “anchor” investor as we are fortunate to. As an entrepreneur, your experience and track record is of great importance but it’s ultimately only a single factor that’s considered in conjunction with your market opportunity, business model, and technical innovations. For venture firms (and the partnerships of individuals that comprise them), your track record of results is the defining (even if not the only) factor in most fundraising conversations.
As an entrepreneur the competition is almost always top of mind… your current competitors keep you busy during the day and the potential ones keep you up at night. On the one hand, most VC firms obviously see hundreds or even thousands of business plans each year and only a tiny number of these ultimately receive investment from that firm. And as an entrepreneur out pitching, after receiving your nth “We really like team and market opportunity, but…” phone calls one might think that VCs don’t worry much about their brethren from a competitive standpoint.
The reality is that the VC business is actually a rather competitive one. While the supply of investment opportunities is immense, the number of truly differentiated startups (with top notch team, real innovation, significant market opportunity, etc) is in fact pretty limited. Whether measured in terms of the number of VC firms in operation or the dollars in the asset class, the demand for these truly exceptional startups is clearly significant. It’s perhaps part of a larger philosophical debate, but IMO ultimately we VCs are less “investment pickers” and more in the “selling expensive capital” line of business.
I was recently chatting with a VC who has been a GP at a large, respected firm for over two decades discussing this very point of competition. How each venture investor “sells” obviously varies… some firms have well-known brands and longer histories, others have particular expertise in a sector, and yet others have certain relationships that add value. But whether your at the earlier stages of a VC career (as I am) or closer to the other end of the spectrum, the competition is always top of mind too.