Of course, VCs have their own internal metrics of success (e.g. IRR or Cash-on-Cash), but these are outcomes of having worked with, and backed great entrepreneurs. There is no other way to getting returns on money invested.
At a time when I’m about to evolve my career into Venture Capital, I wanted to tally up what I’ve learned working with some great VCs, knowing or observing others, and interacting with many entrepreneurs who have also worked with VCs.
First, some general observations on a few obvious topics:
VC Value is Relative. Because a startup evolves so much during its lifecycle, the match between the needs of a startup at the particular stage they are at, and the VC’s capabilities against that stage is a key factor in assessing the value received from a VC. This means that a VC could be great during the startup mode, but not as strongly valuable during a scale-up phase, and vice versa. That’s why some VCs are pre-disposed to investing in some stages and not others, although these alignments aren’t always totally cast in stone. A VC who invests in seed and early stages probably needs to be the most versatile of all, because they will see the startup in several phases of evolution.
Extensive Operational Background. It helps, although it is not entirely needed. A lack of it can be compensated by a few years of observation and pattern matching, but there will still be risks of blind spots. There are three types of operational history: a) having founded a startup, b) worked at a startup, c) worked in a related corporate job.
The Relationship. If the startup is the client, then the VC is a vendor. Typically, vendors adapt or tailor their solution to the customer. Venture Capital is first and foremost a service business.
Skills and Experience. The combination of skills and experience that the VC brings are important, but they are as good as how they match against the needs of the startup and the personalities of the entrepreneurs. (see above first bullet)
One VC Can Make a Difference. While a startup will typically work simultaneously with several VCs, often there is one VC that can make the most difference because of how they have worked with that particular entrepreneur. That applies to success and failure. A single VC can also drive a given startup to failure.
Soft Skills. If there’s one overriding factor, it’s the individuality of the VC that makes the biggest difference. To a lesser extent, it is the VC firm, although when both the VC and the VC firm are excellent, then a spectacular outcome can happen.
Flavors of VCs. Some VCs like products and enjoy talking product vision and roadmap with the founders. Others will focus on helping you build your team. Another segment will jump into business development and keep pushing partnership deals to you. Others will help you secure new sources of funding. Overall, having a balance is better than having a particular obsession over a singular expertise or interest.
So, what are the qualities to look for, from an entrepreneur’s perspective? I’ve segmented the characteristics of a great VC according to 6 unconventional buckets:
- Who they are
- How they think
- How they behave
- What they do
- What they want
- What you don’t see
Who They Are
- Experienced with a rounded operational history.
- Sales and marketing experience is a bonus.
- They have a legacy and a record.
- VC’s character: Trustworthy, Collaborative, Energetic, and Passionate. Honesty with Integrity.
- Leaders in their community and in the ecosystem.
- Market analyst
- Original thinker
- They market themselves
- Industry knowledge
- Domain expertise
How They Think
- Service mentality. The entrepreneur is a client and the hero.
- That the entrepreneur is letting you invest, not the other way around.
- In pattern matching, via qualitative or quantitative analysis, but according to their own experiential history. They assess the management, market and product (pre-investment).
- They think like a CEO and take a CEO’s perspective.
- Need to court and charm the entrepreneur. There is business romance involved.
- They see what others don’t – connecting the dots between market, people and technology. They believe their instincts, but it’s based on their experience. (this could be a negative aspect sometimes)
- Want to see traction, a great product, a winning team, a big market opportunity, speed of execution, and achievement of objectives.
What They Want
- An entrepreneur that demonstrates an intensity of efforts.
- An entrepreneur that knows the market they are operating in.
- An entrepreneur and a team that have demonstrated speed and quality of execution.
- Entrepreneurs who are ambitious, doing difficult things and possessing good management skills.
- They like to see the entrepreneur grow and develop commensurably with the growth of their company.
- Open, sincere and regular communications with the companies they invest in.
How They Behave
- Soft skills are important – a VC who is not nice to deal with will not attract the best entrepreneurs.
- A good VC never makes you feel bad – they are supposed to be supportive. Being entrepreneur-friendly is easier said than done.
- They are trustworthy.
- They exhibit Thought Leadership. A VC is exposed to many opportunities. It’s a gift if they keep synthesizing and communicating what they see, so that others can benefit from their insights.
- They become an advocate of their portfolio companies, and do so in a credible way.
- They have great communications skills;- verbal and written: in blogs, speaking, media, and social media.
- They think strategically and see ahead, 2-3 steps ahead of you.
- They have good persuasive and sales skills. They use them to benefit the companies they invest in, not against them.
- They ask questions, but don’t impose their views. They realize that it’s the entrepreneur who is in the driver’s seat.
- They get excited when they see a company’s vision or product’s roadmap.
- They love technology and believe in its positive impact on society and business.
- When things aren’t working out, they are clear and decisive.
- When they turn you down for funding, they still maintain a cordial and constructive relationship.
What They Do
- They like to mentor, advise and coach entrepreneurs. They can see the big picture, away from the details.
- They find/recruit talent for their portfolio companies.
- They work collaboratively with the entrepreneur. They like to hear about challenges and diagnose problems with the entrepreneur.
- They have excellent listening skills. They are often a sounding board for the entrepreneur.
- They pro-actively work to gather additional financing for their portfolio companies.
- They nurture a large network of entrepreneurs.
- They understand and can discuss strategy well.
- They focus on helping the startup scale and grow.
- They blog as a way to stay connected, learn from their readers’ discussions, expand their circle of influence and network of relationships.
- They are active on social media to communicate and share what can benefit others.
- They always think about the companies they invest in, and about startups in general.
- They use the products they invest in, to the best possible extent.
What You Don’t See
- Their relationship and credibility with other VCs (although you might deduct from some signals).
- How they get along, and work with their partners and partnership.
- How they interact with their limited partners.
- How they network (although some of it is visible).
- Their failures.
- If they give up on you, because they don’t always tell you that upfront.
- How they “really” think.
- Their inner discipline that dictates what they can or can’t do.
A VC is Like the Octane of the Fuel
Rich Barton (founder of Zillow and Expedia) said it best in this recent Geekwire Summit interview with Bill Gurley. He equated the quality of the VC you work with to the level of octane in the fuel. His advice, “get the highest octane fuel in the tank.”
The reality is that Venture Capital is a people’s business, and it’s a service business. It’s about instincts and gut feel. And it’s about picking the right combination of people, products and ideas.
While the above was a list of WHAT makes a great VC, as far as WHO makes a great VC, the answer is clear: no one else but an equally awesome entrepreneur!