Jeff Bussgang once told me ‘it takes $30mm to train a VC’.
I’ve been thinking about this comment a lot over the past few days while following two very interesting blog posts from my friend and colleague, Jerry Neumann. As is often the case, Jerry cuts straight to the heart of an important issue, this time regarding the issue of training young VCs. In his posts (see here and here), Jerry postulates that the venture industry does a piss poor job of training new VCs, arguing:
One of the odd things about venture is the lack of seriousness about what we do. Venture is the only professional services business which does not think training its employees is a good idea. Witness Brad Feld’s comment—ironically, in the textbook that Kauffman asks its Fellows to read—“We don’t intend to hire associates and train them; [when we retire] we are just going to shut shop and go home. Done!” This après moi le déluge attitude means that our industry continues to be half-staffed by people who half know the job. I am constantly amazed at the crazy things other angels do, usually sins of omission, and VCs I know express the same sentiment about other VCs. In no other profession do they expect people to just show up and do the job well. In our profession many show up and do the job poorly. We all suffer. If we care about innovation—not just making money—we should be training people how to invest in and manage investments in startups.
Both Brad Feld and Fred Wilson said they did not have junior VCs because they did not want to burden entrepreneurs with inexperienced VCs. This makes a ton of sense. But, then, where should experienced VCs come from? Andy Weissman comments that perhaps VCs are best trained by being entrepreneurs.
And finally, Jerry concludes:
So if specialized knowledge is needed, how to generate it? Kauffman has their Fellows program to train VCs. Andy thinks being an entrepreneur is the best training. I disagree with both. I think only doing the job teaches the job. And since no one wants anyone doing the job who doesn’t know the job, this means a long apprenticeship. But the best VCs seem to not be interested in having apprentices. So, then what?
In my opinion, if we want better trained VCs, then either the culture has to change so VCs feel an obligation to train the next generation, even though it costs them money, or the LPs need to start looking out for their future returns in addition to their present ones and compel VCs to have a bench.
As a young VC learning the business from the inside, this issue is front and center in my life.
There are a number of important questions embedded in this discussion:
- What are the characteristics of a good VC?
- Can these characteristics be trained?
- If so, how should they be trained?
Before going further, I will broadly qualify that there are no right answers to these questions. If there is one thing I have learned over the past three years it is that there is rarely a right answer for anything in venture – the degrees of freedom in this business are too massive to isolate specific success variables in any meaningful way. There are simply many different ways of doing things, each with their own costs and benefits. And in case you don’t believe me, please tell me which of the following venture models is ‘right’?
- SV Angel: seed, small checks, broad basket portfolio approach
- First Round Capital: seed, hybrid check size, hybrid concentrated/broad basket portfolio approach
- Union Square Ventures: early stage, larger checks, concentrated portfolio
With the qualifier above noted, let’s debunk one notion immediately: being a successful entrepreneur (or even a failed entrepreneur) is absolutely not a criterion for being a good VC. The data is extremely clear on this – there is little correlation between the best VCs and past entrepreneurial experience. That is not to say that entrepreneurial experience is not an excellent segway into VC, it’s just not a required segway.
So getting back to our three questions: what are the characteristics of a good VC? Can these be trained? And if so, how should they be trained?
My hypothesis is that there are certain innate characteristics that are not only table stakes to play the game, but represent the intangible factors that distinguish the good from the great. These characteristics include:
- Honesty and integrity
- Intuition about people, markets and products (in that order)
- Intellect to problem solve and think critically about risk and opportunity
- Empathy for all stakeholders
- Personality to build enduring relationships
- Strategic mind
On the one hand, I don’t believe that it is possible to train these characteristics – you either have them or you don’t. Yet, on the other hand, I do believe that some of these – most specifically intuition, empathy and a strategic mind – can be refined and honed over time through life experience.
In addition to the innate characteristics, there is a second class of VC characteristics that are mostly acquired through traditional learning and on the job training. These include:
- Product expertise
- Domain and market expertise
- Deal making skills
- Network of relationships
- Financial savvy
There are many ways to acquire these characteristics – entrepreneurial experience, working in industry, learning on the job as a junior VC (although this won’t work for product), etc. It is tough to pinpoint a ‘best’ path, as each path teaches different and relevant skills. As Jerry notes:
The best—in fact almost all—VCs have historically come from one of five places: VC, banking, law, technology firm management, or journalism…Each of these paths teaches people some of the necessary skills to be a venture capitalist, but not all of them.
To be clear, while you can learn many of these acquired characteristics, I do not mean to imply that learning them will make you good or great at them. The degree to which you are good at something is generally a function of both your training and your natural born capacities. Different people have different natural strengths – some have natural product vision, others are killer deal people. No matter how much I train, I will never be as good at throwing a ball into a circular hoop as Michael Jordan. My point is not to diminish the importance of innate disposition, but rather to emphasize that these skills and characteristics more readily lend themselves to be improved through traditional learning methods in contrast to the uniquely innate characteristics described above.
Finally, I believe there are certain VC characteristics that are only acquired through direct life experience:
- Situational experience
- Cyclical market experience
In a blog post I wrote after meeting with Fred Wilson in November 2010, I commented:
While there are certain traits common to all successful investors - intellect, intuition and disposition - these are merely necessary, but insufficient, conditions to being great. Venture investing (like many investment professions) is heavily informed by pattern recognition, and for better or worse, pattern recognition is naturally derivative of experience.
The reality is that no amount of intellect, intuition or disposition can fully prepare a young VC to manage a dysfunctional board, bite the difficult bullet of a down round financing, push through painful but necessary management changes, or navigate macro economic cycles.
Given the framework laid out above, where does this all leave us with respect to the issue of training new VCs?
It is clear to me that there is a fundamental need to train young VCs by giving them access to the experiences necessary to grow into great venture investors. Part of that education can come through on the job training (both in and out of VC) and supplementary learning initiatives (e.g. individual learning, Kauffman Program, etc), but a massive part can only be acquired through the passage of time and living through various situations and scenarios. To me, the key to navigating learning through life experience is mentorship. As summarized in my Fred Wilson blog post:
In the absence of years of experience, there is one absolutely critical way to mitigate the risks of inexperience while young investors learn on the job - mentorship. As Fred has advocated time and again on his blog, the venture business is best learned through apprenticeship (at the very least this is true for those who are career VCs and not transplants from successful entrepreneurial careers). No training program in the world can prepare one to be a great VC precisely because experience is such a principal component. Having the opportunity to lean on and glean from the experience of those who have walked the walk is invaluable. It is not a ‘nice to have’, but rather a ‘need to have’.
While some firms have made the conscious decision not to train young VCs (I get it and respect the choice), many have thankfully chosen to mentor new entrants to our industry and provide them with the fertile learning ground upon which to grow into impactful venture investors.
Just last week, FRC announced that Phin Barnes and Kent Goldman had been promoted from Principal to Partner. Shortly prior, Mo Koyfman was promoted to Partner at Spark Capital. Eric Weisen of RRE was promoted from Principal to Partner two years ago. There are countless other strong young VCs out there that are making a huge positive impact – Adam Ludwin (RRE), Marissa Campise (Venrock), Christina Caciappo (USV), Andrew Parker (Spark), Matt Witheiler (Flybridge), Charlie O’Donell (Brooklyn Bridge Ventures), to name just a few that I am personally close with (and there are many many others not mentioned). These are a few examples of individuals who have grown and matured in the venture industry over the years. Only time will tell if they ultimately become great VCs, but early indications are promising that this crew (and others) represent a bright future for our industry.