As an entrepreneur for the last two years, I have spent a lot of time thinking about what makes the ideal venture capitalist.
Until two years ago, I worked as a VC in a boutique fund in Israel, working with a range of emerging Internet technology companies. During that period, I thought I was providing my deal flow and portfolio companies with sound management, marketing, and finance advice. Though I didn’t do anything catastrophic that I regret, today, as an entrepreneur, I do look at startups from a different perspective. I’d like to share this perspective with my former colleagues in the venture capital world as well as other entrepreneurs in order to help close the chasm between VCs and entrepreneurs.
All too often, analysts/associates/principals at venture capital firms come either right out of business school or with a few years of experience with a corporation, a consulting firm, Wall Street, etc. As valuable as this experience is, working in a corporation is very different from running a startup.
To be an effective advisor to entrepreneurs, those working with them at venture capital firms need to understand the operational differences between the world they have come from, and the world of the start-up.
- Stop the PowerPoint trail and instead spend an hour with the entrepreneur. The most difficult decisions we ever have to make are the ones we where we feel we don’t have complete information. Associates attempt to compensate for their lack of knowledge by requesting a never-ending trail of PowerPoint presentations, executive summaries, spreadsheets, budgets, estimates, and other documentation from entrepreneurs.
Associates: Stop this paper trail and just sit down with the entrepreneur. You’ll learn and understand more from asking the entrepreneur questions face-to-face than from the mis-invested time you spend reading these documents. As a result of these meetings you’re more likely to make an informed recommendation to your partner regarding whether or not your firm should pursue the due diligence leading to an investment. So please save the entrepreneur countless hours preparing these materials for you, and just meet with them.
- It’s all about the team. The success or failure of the company is based on execution. And it takes a great team to execute well. It’s better to invest in a less exciting idea backed by a strong management team than investing in a brilliant idea backed by a team of questionable value. A winning team will eventually win, but a losing team will destroy any idea. Just repeat this mantra: it’s all about the team, it’s all about the team.
You want a team that is honest, competent, and hard-working. A team with a proven track record that’s comprised of individuals who have known each other for a long time and who value their name much more than any monetary compensation.
- It doesn’t really matter if you’re investing in a better mouse trap or new technology. As an investor, your objective is to show a return for your investor’s investment. As sexy as a new technology might sound, just being first isn’t enough. How many Internet companies do you know that really invented new technology? Take for example Amazon’s recent acquisition of Quidsi for $545 million. Quidsi operates Soap.com, Diapers.com and BeautyBar.com. Did Quidsi reinvent the wheel? No. Did they create value? You bet! So is an Internet company selling diapers a “VC story”? I sure hope so.
Though it’s nice to have the competitive advantage of being the first to implement a brilliant idea, just ask the founders of Netscape, Friendster or Myspace how much being a first/early helped them. I’m a huge fan of better mouse traps. The market is there and proven, and thus it’s all about finding the right team and properly executing.
- Get out there and work for a start-up. My final and perhaps most important piece of advice for VCs, particularly for analysts and associates, is to get out of Sand Hill Road, Hertezlia Pituach, etc., and join a startup.
Spending a year or two at a start-up will give you a lot of insight into how to be a better and more valuable VC. You’ll see first-hand how entrepreneurs operate, and not just after they prepare for a VC visit. You might decide that you want to stay working at startups. But even if you return to a venture capital firm, you’ll be much wiser from the experience, and you’ll be able to provide your entrepreneurs with more valuable advice.
Tomer Tzach is the CEO of an online marketing company DPlace Marketing, which operates Zoara. In his next column, Tomer will flip the coin and provide advice to entrepreneurs on how best to work with their VCs.
[image via Flickr/Mark Coggins]