Does operational experience help a VC?

The folks at PEHUBWire have done some research into the backgrounds of the 100 most successful VCs in the US, as defined by Forbes’ Midas list.  See the link above for the detail, but the headline is that of the top 100, 54 had no operational experience, 25 had low level operational experience (John Doerr and Mike Morritz are in this group) and 21 had been C-level execs.

Their conclusion:

What does this all mean? Basically that a venture capitalist’s resume is not necessarily an indicator of his or her future success. Plenty of operators and ex-operators have done well, and plenty of each have done poorly. It’s easy — and arguably intuitive — to say that one is better than the other, but that doesn’t make it true.

I think the reason that that VCs come from a wide range of backgrounds is that the skill set to be successful is very broad, broader than can be found in either operational or non-operational roles.  So all comers into VC have a lot to learn to be successful.  Ronald Cohen, perhaps the father of UK venture capital put it his way in his recent book The Second Bounce:

In private equity you have to be financially trained and to have an understanding of management, but you also have to have a strategic brain while being sensitive to tactical and people issues.

For me the main thing to think about when evaluating whether you want to work with a VC is whether you would like to see her on the opposite side of your board table every month for the next five years – and to establish that the two big questions are personality/cultural fit and whether you share the same vision and values.  (I wish these last were my own words, but in fact I borrowed them from a post Fred Wilson wrote a month or two back about building long term relationships.)

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  • Charlie Blake Thomas

    Nic, I agree about the relationship side of things but that can be offset if someone sitting opposite you has been there and done it successfully before and can help you avoid all the pitfalls that crop up. Sitting opposite a pure financier will not mean you get the most from your investor, in my view.

  • David Jouarisse

    Hej that's an interesting post because it breaks a commonly and wrongly shared idea, and thanks to share about “The second bounce”, this will be a good reading in August!;-)

    If there is one outstanding VC between all it is Michael Moritz, he's got my highest consideration not only because he is a good Christian (any miracle here?:)) but most of all because I don't see any other VC on earth who possibly has any similar “star record”, he is THE “serial”; only half of one of those hits would have hyper satisfied any LPs of any European VCs: YHOO (I recall: 25% if the shares for $m1 with IPO less than a couple years later in the range of $b5 valuation if my memory's correct), GOOG, Apple, Paypal, Youtube (despite Youtube's exit looks like a double “self-service” off GOOG where he was seating on the board…) etc.

    The other interesting point about your post's question applied to MM's background, besides the fact in had no operational background in a start-up, is that his previous experience was dealing with “Intelligence”, information, IT oriented… very curious guy, with unique ability to manage information, exploit its essence and develop a vision out of it. I remember I was explaining precisely this about five years ago to someone in London precisely about this operational background subject!…:) Then a virtuous circle is coming into place to reinforce this key initial edge (big brands names attracting the best deals…)

    After this being said, MM had excellent academic background enabling him to have and develop further this vast set of functional competences VC requires in human resources, strategy, marketing, finance, operations… the flair he has, not coming from any start-up operational background either, might result more from good intuition on people rather than academic courses…

    Now I think I know at least a couple companies which should interest MM… ;-))

  • Thanks David – I think you are right in saying it largely comes down to good intuition and judgement on business and people, and no one background is much better than any other for this

  • Charlie – my point here is that no one background is any better than any other. In my experience of sitting round board tables financing and consulting types (which is mostly where I come from) can be prone to over application of theoretical models and insufficient appreciation of the practical realities of business whereas the most common weakness of operational types is to try and repeat the things that worked for them before with insufficient understanding of how things are different this time round. Both of these are matters of experience and can be overcome by time spent working with many businesses, which I think is ultimately the best single thing to look for.

  • Yes, absolutly.

    But more important than operational experince can be to be more open minded and to take the effort to understand a unusual business concept, what most VCs are not willing to do so.

    99% of them even do not respond to email requests … Listen carefully VC Fund investors…!

    If they do answer to email requests and do not step into a dialogue with the entrepreneur, how can they find the 'next big thing' and make money for their Fund investors?

    My experince with VCs is that they are looking for the 'next big thing', but still want something which has an 'proof of concept', means an other copy of something. And this is definitly NOT the next big thing!

    A good example for this is Google, they went two years searching through Silicon Valley to raise funding for their SE. Nobody has finance them.

    They raised one million privately – 'love money' through family and friends, set up their SE and than the big 'vorward thinking' (I laugh) VCs gave them their first funding.
    They simply jump on the rolling train, with very low risk!

    Imagine what has happen if they 'should not have' raised this first one million of 'love money' from familiy and friends! Today we've had no Google!

    In my opinion 99,99% of VCs out there do not recognize 'the next big thing' when it slaps them directly in their faces. They want a GURANTEED profit, with low, very low risk, better no risk!

    With this kind of attitude the most of them will never get the opportunity to be invested in the 'next big thing'!

  • brogankeane

    This may seem obvious but aren't the Top 100 stats only relevant in the context of overall 'market' composition? In my experience with VCs, there seems to be an overwhelming number of bankers and consultants in the field with a generally lower representation of C-level executives. If that's the case, than a 20-25% make up in the Top 100 by C-Level execs may actually indicate a categorical anomaly rather than a neutral or weak showing.

    Nic, do you have a sense of the percentage of total VCs who come from an operational background?

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  • Operational skills should be used on every level of company status. I'm sure VC's who have the operational expereince perform much better than those without it. That should be the real test and result to this question.

  • Experience of the development, implementation and monitoring of operational performance indicators?

  • Any experience helps, but the question I was trying to get at is the merits of operational experience vs banking, consulting.

    Overall you need to be very rounded as a VC and no one background provides that.

    Re metrics – you also get that experience as a consultant, and as a VC.