I’ve seen Mark post a few versions of this tweet over time and wanted to write a post about it. I agree with him, but the reasons are complex. Fortunately Steve Schlenker, co-founder of DN Capital has captured most of them in his Quora answer to the question: How hard is it to be a venture capitalist.
Before I go any further let me say why I’m writing this post. I can see that it might look self-serving, but my motivation here is to help others thinking of becoming investors. To get it out of the way, I’m definitely not writing because I want anybody’s sympathy (I don’t) or because I want to say how clever I am for overcoming the difficulties (not my style).
I’m writing this post for people who are thinking of becoming investors because lots start investing, lose their shirts, and then wish they had done something else with their money. I’ve seen that happen to angels, entrepreneurs, and corporate VCs.
The root of the problem, I think, is that from the outside venture capital looks easy, especially during bull markets. The papers are full of stories about IPOs and big exits and it seems like every private company is able to raise money, even the ones that have obvious flaws. Moreover, even experienced and successful venture capitalists are investing in companies that look stupid. Ergo – investing is easy. The most glaring omission from this simple analysis is the timing lag that makes venture capital so hard. As Steve says, excepting hyped sectors, most companies take 7+ years to reach maturity, even in the good times. The IPOs and big exits on Techcrunch everyday, therefore, received investment back before the markets were hot and most of the private companies that seem so exciting today will face the difficult challenge of a down market in the years to come. Many will fail.
Making consistent returns as a VC requires building a portfolio of companies in the difficult times that are ready to exit when the good times come. That necessitates raising capital when nobody wants to invest in venture and having the vision, discipline and patience to build value in a portfolio over time. All three of these are far from easy, but it is raising capital which is the hardest, particularly here in Europe where the venture industry is only just losing the awful reputation it gained during the 1999-2000 bubble. That said, even once they have money most investors pick bad companies. Surprisingly few funds back enough winners to make enough profits to reach carry. I haven’t seen data, but I would be surprised if more than 30% of funds get there.
Finally, the skill-set of a successful venture capitalist is incredibly broad. Ronald Cohen, founder of Apax and one of the founders of the VC industry here in Europe put it this way in his book The Second Bounce of the Ball:
[investors] 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
To that I would add empathy, patience, grounding, creativity and hustle. There’s no single career that prepares you for that. Banking and consulting will give you strategy and tactics but not the operational experience and running a startup doesn’t teach strategy. So everybody has to learn on the job. Then on top of that experience makes a massive difference, as Steve says:
The best investors are the ones who have LOST money in the past so can recognize a pattern of what NOT to do, as much as a pattern of what TO do. This is truly one of the great internship businesses, don’t assume because you have made great angel investments, or built a successful company yourself, or made public sector investors a lot of money in the same sectors that you can immediately pivot those skills into managing LP capital deployed in a structured way into early stage private company risk positions.
I could say more, especially about the day to day challenges of running a fund and investing, but this post is over 700 words already and I think I’ve made my point. Venture investing is hard because the job is inherently difficult and the required skill set is exceptionally broad. That’s also what makes it fun.
I recommend Steve’s Quora answer if you want to read more.