How to be a Venture Capitalist When You Grow Up
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Transcript of How to be a Venture Capitalist When You Grow Up
Theentrepreneurialecosystem,aswithanyhealthyecosystem,isfullofdiverse
playersandinterdependentsystems.Amongallthecomplexities,oneofthe
fundamentalcomponentsthatmakethisecosystemworkisthefinancingsystem,as
nearlyallstart‐upsneedoutsidecapitaltogrow.However,thisecosystemisrife
withrisksobankersareseldomseen,especiallyrightnow.Andthepocketsofyour
friendsandfamilyareonlysodeep.Sowhoistheretoreallybankrollacompany
whenitispoisedto“hockeystick?”Well,thereareangelsfloatingaround—
literally—buttheyareadisparatebunch.TheanswerisVentureCapitalists(VCs),
whonotonlyhavetherisktolerancetotoleratetheunknownfrontier,butalsohave
theuncannyabilitytofindthepioneersouttherethataredestinedforgreatness,
andhelpthemforgeahead.
Thispaperlooksatthissmallgroupofinvestorsthatnurturetheentrepreneurial
elitebytakingbigrisksandwritingbigchecks.Morespecificallyitfocusesonjust
whotheseVCsareandhowtheyearnedtheirstripes.Itattemptstoidentify
attributesthatsuccessfulVCsshareandprovidesomeinsightthatyoucanshare
withyoursonordaughteriftheytellyoutheywanttobeaVCwhentheygrowup…
PARTI:FROMTHEHORSE’SMOUTH
BasedonmyconversationswithahandfuloflocalVCsandtheblogsofseveral
dozen,thereseemtobeacoupletrendsamongVCswhenitcomestobecomingone
ofthem.First,whenaskedhowtheybecameaVC,thementionoflucksomehowfits
intotheiranswer.WhenIwasakid,Iwassentawaytotenniscampduringthe
summerandtherewasasigninthedininghallthatread:“Luckiswhathappens
whenpreparationmeetsopportunity.”Andthattendstobemyreactionanytime
someonetellsmetheywerelucky.Certainlyluckofthedumbvarietyexistsout
there,butIbelievethevastmajorityofluckisoftheformerkind.So,furtherbelowI
willdelveintothatpreparationcomponentandseeifthereareindeedshared
experiencesorattributesthatledthemtotheopportunityofbecomingaventure
capitalist.
Next,whenyouaskaVC“howcanIbecomeaventurecapitalist?”manyhavea
similarresponse:“ThatisthesecondmostaskedquestionIget,thefirstbeing‘how
canIgetyoutofundmycompany?’”Therealityisthatthereisnolineartrajectory
tobecomeaVC.ThereisnoladdertoclimbwithinmostfirmsbecausetheVCmodel
reliesonbeingminimalistic.Formostfirms,thereisreallyonlyroomforthetoptier
positionofpartner,whichisduetothestructurethatcoverscompensationand
overheadexpenditures.Additionally,therealvalueofafirmcomesfromthe
partners,astheyaretheonesthatcreatethedealflowandhavethecapabilitiesand
connectionstohelptheirportfoliocompaniesthrive.Forthemostpart,itseemsto
beanallornothingkindofbusiness.
SethLevine,alocalVCwiththeFoundryGroupactuallyhasoneofthemost
referencedblogsregardingthisconundrumofhowtobecomeaVC.Infact,themost
popularVCblogaccordingtotheNewYorkTimes1—www.avc.com—essentially
referencesSeth’sblogwhenitcomestothistopic2.
Sethhastwoveryinsightfulpoststhatspeakspecificallytothisquestionthatheis
sooftenasked.Inthefirstpost3from2005,hemakesfiverecommendationsthathe
listsassteps.ManyeagerVCs‐to‐bearesurelydisappointedtoseethatthefirststep
istocometotherealizationthatyouwillmostlikelyneverbecomeaVC.Theharsh
realityisthattheVCcommunityisverysmallinnumbersandthereisalonglineof
verytalentedcandidatesatthegate.
Seth’ssecondstepspeakstothepointmadeaboveaboutthestructureofVCfirms.
Theyrunleanforareasonandifyouthinkyouaregoingtobeanassociateata
smallfirm,youbetterbe“significantlyimpactingtheirlivesinapositivewaythat
makesthetrade‐offworthwhileforthem(youcostlessthanthemarginallifebenefit
theygetfromhavingyouaround)and/oryouwillhelpcreatemorecarry(i.e.,they
1http://www.nytimes.com/2008/09/22/technology/22venture.html?_r=1&pagewanted=2
2http://www.avc.com/a_vc/2005/05/getting_a_vc_jo.html
3http://www.sethlevine.com/blog/archives/2005/05/how‐to‐become‐a.php
canmanagemoredealswithyouaroundandthereforedeploymorecapital;you
haveaskillsetthatwillpositivelyaffecttheportfolio,etc.).”Ifyouthinkthissounds
doable,thinkagain.Youbasicallyhavetobeabletodosomethingthepartners
cannot.Thatisabigchallenge,andevenifyoulandajobasanassociatedoingtasks
thepartnersdon’thavetimefor,thechanceofmakingthejumpuptothetopis
minimal.AccordingtoJohnNesheim,“attemptstobecomeapartnerbyclimbingup
fromanassociatepositionhavemostlyresultedindeparturefromtheVCfirm
withintwoyears.”Theyrealizetheoddstheyareupagainstandmoveontomore
realisticopportunities,oftenwithahotstart‐uptheyhaveidentified.4
Seth’sthirdandfourthstepsareallaboutimmersingyourselfintheentrepreneurial
ecosystemwhereVCsightingsmostoftenoccur.Traditionallyitishardtogetface
timewithVCs,astheyarebothverybusyandhighlysoughtafterbystart‐upsuitors.
LivinginBoulderandbeinganMBAstudent,mysituationhasbeenatypical.Ihave
beenveryfortunatetohaveanadjunctprofessor(JasonMendelson)thatisafull‐
timepartnerattheFoundryGroupandalsohaveaccesstootherVCsthrough
extracurricularactivities(VCIC)andotherlocalmeet‐upevents.Ithinkthe
accessibilityoftheVCcommunityinBoulderisprettyspecialandonethatcan’tbe
takenforgranted.Regardless,youhavetomaketheefforttowadeintotheirwaters
andcreateavaluableandlong‐termnetwork.Ifarareopportunitydoesarise,Iam
willingtobetitwon’tbepostedonMonster.com.Ifyouaren’tontheradar,youare
lostatsea.
ThelastofSeth’sfivestepsistocomefullcirclebacktosteponeandrememberthe
oddsyouareupagainst.Don’tgetdiscouraged,justberealistic…
InSeth’ssecondpostfrom2008,5herevisitsthetopicofbecomingaVCandlists
actualactionsthatcanbetakentoincreaseyourchances.Indoingso,hehighlights
sometraitsorexperienceshethinksmanyVCsshare,forbetterorworse.Infact,he
4http://nesheimgroup.typepad.com/my_weblog/2007/02/to_be_a_vc_or_n.html
5http://www.sethlevine.com/blog/archives/2008/04/how‐to‐get‐a‐jo.php
makesitprettyclearinhisresponsestothefolksthathavecommentedonhispost
thatjustbecausethesesimilaritiesexistdoesn’tnecessarilymeanthattheyequate
tobeingagreatVC.
ThefirstactionitemisgetanMBA,butnotjustanyMBA.Infactmysoon‐to‐bealma
materdoesn’tmakethegrade.HispointisthatmanyVCfirmsfiltertheirapplicants
basedonwheretheygottheirdiploma.Ifyourresumelackspropernounslike
Harvard,MIT,orStanford,youmaynotevenbepickedupontheirradar.Infacthe
goesontowritethatitcanactuallybedetrimentalifyougetanMBAbutdon’tgo
thetoptierschools.ThelogicforthisbeingthattheVCfirmsseeyourinabilityto
attendatoptierschoolasthefirstsignofyourineptitude.Whileotherswillargue
thatthesetoptierstudentshaveotherissueslikeingratitudeandasenseof
entitlement,Sethisjusttellingithowitis,nothowitshouldbe.
Thenexttwoactionitemsareeithergoworkforastart‐uporstartyourown.Tobe
aVC,youneedtoknowtheentrailsofayoungbusiness,andsomepeoplethinkthe
morefesteringtheentrails,thebetter.GuyKawasakisaidoneofthebestthingsyou
candoonyourpathtobeaVCisworkforastart‐upthatfailsbecauseyouseethe
mistakesmadeandwhatyoudidwrong6.AsaVC,knowingthetelltalesignsof
sicknessisjustasimportantasknowingthoseofsuccess.Sethpointsoutthat
workingforastart‐up,youwilllikelyhaveinteractionswiththehandthatfeedsthe
companyandbegintodeveloppowerfulrelationshipsthatcouldserveyouwellinto
thefuture.Furthermore,ifyouindeedstartacompanyandknockitoutofthepark,
youarebetterpositionedtobecomeaVC,eitherbecauseyounowhavethecashor
haveestablishedgreatrapportwiththefirmthatfundedyourcompany.
Thenextactionitem—gogetajobatabankorconsultingfirm—isthemost
disputedwithintheblogosphereandamongothersinthefield.Itfollowsthesame
logicasgettinganMBAfromHarvard:itvalidatesyouaresmartandwillworkhard,
anditmakesiteasierforVCfirmstoslimdowntheirmountainofresumes.Many
6http://www.youtube.com/watch?v=gYNyvP_hz2U
people,includingMr.Kawasakiwouldarguethatgoingthisrouteistheworstthing
youcando.Itwill“fundamentallycorruptyouandeatyourbrainout.”Againthis
comesbacktothedifferencebetweenbecomingaVCandbeinggoodatit.Sethis
speakingtotheformer.HemayverywellagreewithGuyonthelatter.
Finally,Sethurgespeopletoputthemselvesoutthere.Makeyourmarkwhereyou
wanttoplay.Ifyouwanttoworkforafirmthatinvestsinweb2.0start‐upsyou
betterbeontheforefrontofitallasanactiveparticipant.Chancesarethatifyoudo
getabreakatafirm,itwon’tbefromyoureachingouttothem,butrathersomeone
theyrespectreachingouttothemonyourbehalf.Andthatonlycomesfromearning
therespectofyourpeers.
PARTII:SURVEYSAYS…
AftergettingtheVCperspective,Ithoughtitwouldbebesttotakeanobjectivelook
attheVCindustryandseeiftheirassumptionsarecorrect.TheNationalVenture
CapitalAssociation(NVCA)hasa2008CensusoftheVCindustry7thatrevealssome
trends,butIwantedtodiveabitdeeperandalsolookjustattoptierfirms.
However,Iquicklybecameawarethatthereisnotapubliclyavailable“list”ofthe
topfirmsoutthere.Manyfirmsclaimedtobeinthetopquartileofperformance,but
didn’treferenceanythingtobackitup.Iimaginetheyusedsomeaverage
performancebasedonafund’svintage,butthatissubjecttodifferentinterpretation.
SoIturnedtomyprofessorandlocalVCwhoprovidedmewithashortlistofhistop
firms:KleinerPerkins(KPCB),Sequoia,Benchmark,Bessemer,UnionSquare,Accel,
NEA,Matrix,Mayfield,FirstRound,andAlsopLouie.AndofcourseIhadtothrowin
theFoundryGrouptoaddsomespice.Thisgenerated151partnersandwasagood
basetogetafeelfortheindustry.
Next,Ihadtodeterminewhichattributestoidentifyandrecord.Afterreading
severalbios,IgotafeelforwhatinformationIcouldfeasiblyextract.Ialsowanted
7http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=344&Itemid=93
toseeifIcouldgetthenecessaryinformationtovalidateordebunkSeth’sclaims
fromhissecondblogpostaboutattributesmanyVCsshare.BelowIdiscussthe
informationIgatheredanddigested.
FirstandForemost…
StatisticallyyouareatamajoradvantageifarevyingtobeaVCandpossesstwo
things:aYchromosomeandasetofCaucasianparents.IimagineSethdidn’t
mentionthesetwomostsignificantcharacteristicsbecausehewasn’taddressing
thingsoutofpeople’scontrol.However,itmustbementionedthat92%ofthe
partnersinmysurveyweremaleand85%wereCaucasian.Diggingabitdeeper,I
alsodiscoveredtherearemajordiscrepanciesbetweenfirms.Infact,KPCB
accountedfor7outofthe12femalepartnersinmysurvey.Sowhilenearlya
quarteroftheirpartnersarefemale,thismeansthatseveralfirmshadzerofemale
partners.TheNVCACensushasagenderratiothatisalittlelessextremebuttheir
percentageofCaucasianpartnersisactuallyhigherat88%.Idon’tintendtoexplain
whythisimbalanceexists,butIdowantpointoutonelastobservation.Ofthenon‐
male,non‐Caucasianpartners,mosttendedtobeontheyoungerendoftheage
spectrum,whichmaymeanthisindustryisslowlybecomingmorediverse.
Speakingofage,thiswasthemostsubjective(andentertaining)partofthissurvey.I
reallyhadtoguesstheagesofthepartnersbasedontheirpictureandperhapsafew
datesintheirbiosthathelpedmyapproximation.Basedonmyestimates,the
averageageofapartneris46withtherangebeing31to70,giveortake5years.
ThesefiguresrevealedtomethatearningyourstripesasaVCcomeswithatleasta
decadeofpreviousexperience,butisalsoajobthatmanydountiltheythrowinthe
towel.Theaveragenumberofyearsthatpartnershadbeenattheirrespectivefirms
alsoconfirmedthis.At7.9years,thisactuallyshowstwothings.One,thatbeinga
partnerislonger‐termcommitment;andtwo,thattheindustryislikelynot
significantlygrowinginsize.Ifitwere,thenewpartnerswouldcertainlybedriving
thisaveragedown.
Sowhattodointhemeantime?
IftheaverageageofaVCisaround46,thenitisimportanttoseewhattheywereup
tointheinterimbeforetheyjoinedtheclub.Ithoughtitwouldbeworthwhiletogo
backtowhereventurecapitalistsearnedtheirundergraduatedegreeandgofrom
there.AtthisstageofaVC’sdevelopment,thereisnooverwhelmingtrend.Harvard
andStanfordstandoutascoastalbreedinggrounds(12%and8%oftotal),butnot
nearlyatthelevelIwilldiscussbelowwithregardtoadvanceddegrees.Thetop12
schoolsrepresentedoverhalfofalltheVCs’undergraddegreesinmysurvey.
Movingontoadvanceddegrees,thetrendthatSethwroteaboutinhissecondblog
wasclearlyrevealed.73%oftheVCssurveyedhadatleastoneadvanceddegree
withthefollowingbreakdown:AdvancedDegree # %
MBA 79 53%
PhD 11 7%
MD 4 3%
JD 9 6%
MastersEngineering 8 5%
None 41 27%
OneinterestingpointwhenlookingatindividualfirmswasthatSequoiahadahigh
numberofpartners—nearly50%—withoutanadvanceddegree.
ThemostnotabletrendwithregardtoVC’sadvanceddegreeswasthesealonthe
diplomas.AsSethcorrectlypointedoutinhisblog,brandseemstobevery
important,withHarvardandStanfordbeingtheCokeandPepsiofacademia.Ofthe
109advanceddegreesearnedamongsttheVCsinmysurvey,nearly60%camefrom
thosetwoschoolsalone.
WithregardtotheMBAdegreesearned,35%camefromHarvard,25%camefrom
Stanford,and90%camefromthetop12businessschoolsintheUS.8Andofthe
remaining10%,nearlyallwereinthetop30.Thesenumbersmakeitindisputable
8http://www.businessweek.com/bschools/rankings
thatifyouwanttobeaVCwhenyougrowupANDplanongoingtograduateschool,
youbetteracetheGMAT,LSAT,MCAT,orGREandearntheproper“seal”of
approval.ThesheerfactthattherearenearlynoMBAsfromsecondtierschoolsmay
evenvalidateSeth’smoreprovocativestatementthatgettingatiertwo(orlower)
degreemayactuallybemoredetrimentalthannotgettingoneatall.Notgreatnews
formanyofthefolksreadingthiswithaspirationsofbeingaVC.Butthereare
alwaysoutliers…
“RealWorldExperience”
MovingdownthenarrowingroadtobecomingaVC,youessentiallyhavefour
optionsonhowtocontinue:1)leavetheroadandblazeyourownpath(bean
entrepreneur);2)mergeontothefastpacedfreeway(workforabigcorporation);
3)becomeatollboothoperator(workforabigbank);or4)becomeatrafficdirector
(workasaconsultant).LookingathowtheVC’sinmysurveypursuedthese
options,somenotabletrendsarerevealed.
Trailblazers
Approximately50%oftheVCssurveyedhadatsomepointventuredoffthepathto
beanentrepreneur.Afewwerefull‐onmachete‐wieldingpioneers(founders)that
forgedtheirwayintotheunexplored,butmostwerepartofanexpeditionteam(C‐
levelcrew).Whilemostreemergedoutofthewoodstotrytheotheroptionslisted
above,8.6%neverpursuedtheotheroptionsandremainedinthewoodsuntilthey
ultimatelybecamepartnersatVCfirms.Oftheseselectfew,nonewerewomanand
mosthadmadeafortunealongtheway.
CruisingintheFastLane
AsIalludedtoatthebeginningofthispaper,VCshangoutinuncharteredterritories
lookingforthenexttrailblazer.However,basedonmyresearch,alargepercentage
ofthem(58%)hadtotakethefreewayatsomepointtogettothere.Thisisn’tabig
surpriseasthisiswhereyoucanmostquicklyadvanceyourcareerandviefor
positioninthefastlane.Theonlyotherthingworthnotingisthattherewerea
handfuloftrailblazersthatovertimecreatedafreewayoftheirownbytakinga
start‐upallthewaytoanIPO.
TollboothOperators
Moneyflowsintoandoutofthetollboothandallthatcoinseemedtoattractabouta
quarteroftheVCsintobankingatsomepoint.Mostofthemworkedforthebiggest
tollbooths,liketheonestogetintotheBayAreaorManhattan,wheretherewas
majortrafficandahighvolumeofmoneychanginghands.
TrafficDirectors
Thefinaloption,directingtraffic,exposesyoutothecomplexitiesofthefreemarket
andultimatelyprovidesyouwiththepowertoinfluencehowwellallthistraffic
flows.33%oftheVCssurveyedoptedtotakeonthisrole—usuallyearlierintheir
careers.Thishighstressoccupationseemedtoburnmostofthemoutovertime.
However,therewasasmallpercentage(8%)thatonlyservedastrafficdirectors
beforetheybecameVCs.Theyweretheall‐stardirectorsthatmanagedtoturna
cacophonyintoasymphonicmasterpiece.
Attheendoftheday,themajorityofVCspursuedsomesortofcombinationofthe
fouroptionslistedabove.Seth’spointaboutbeingabankerorconsultantwasn’tas
significantasone’salmamater,butstillseemedrelevant.Itissurprisingtomethat
onlyhalfoftheVCseverventuredoffthetrail,especiallyconsideringthatthisis
wheretheyhavetospendsomuchtimeasVCs.Justknowingwhetheryouhavethe
risktoleranceneededtosurviveinthisenvironmentseemscritical.Theskills
learnedwithincorporations,banks,andconsultingfirmsmustbeofvaluewithinthe
entrepreneurialecosystem.Ithinkthemoreimportantfactoristhatyouprovetobe
exceptionalatwhatyoudo,regardlessoftheoptionsyoupursue.
OtherNotables…
Whilereadingthroughthe151bios,Ialsokepttabsoninterestingaccolades,
communityoutreachactivity,family,andquirkyfactsabouttheVCs.Individual
firmshaddifferentstylesonhowtheypresentedthemselvesontheirwebsites.
Someweremoresuccinctwhileothersweremorepersonal.Withregardto
accolades,itwasnosurprisethatthisgroupisadornedwithawardsand
recognition.Forme,itmadethepursuittobecomeaVCseemevenlessattainable.
Heck,AlGorehadtoserveasVP,winanOscar,andthenbecomeaNobelLaureate
beforehewasaskedtobeapartneratKPCB!
Communityoutreachinvolvementandmentioningthatyouhaveawifeandkids
seemedtobebroughtupbytheonlythemostsuccessfuloftheVCs,particularlythe
foundingpartners.Itwasalmostlikeyoucan’tmentionthatyouactuallyspendtime
doinganythingelseotherthanwearingyourVChatuntilyouhavehadadozenIPOs
underyourwatchorhaveyourlastnamementionedinthenameofthefirm.
Finally,thequirkyfactsweremoreorlesssprinkledthroughoutthebiosandmay
haveonlybeenquirkytome.TheFoundryGroupprobablyhadthemostandIfound
ittobeanicetouch.Itmadethemseemmore“real”andmemorable.Afterreading
151bios,theVCsthatstuckoutweren’ttheonesthatsaton12boards,buttheones
thatmentionedtheyalsoareBBQjudgesorpart‐timerockstars.
PARTIII:STILLINTERESTED?
AfterlisteningtowhatVCshavetosayandtakinganobjectivelookatthebiosof
someofthemostsuccessfulVCsinthecountry,itiscertainlyapparentthatitisno
easyfeattoearnthetitleofpartneratareputableventurecapitalfirm.Whilethere
aremanypathwaysthatleadtobecomingapartner,allofthemareextremely
challengingroutesintheirownright.Therealitythattherearemajordisparitiesin
raceandgendermakesitevenmoredauntingforthosethatarecurrently
underrepresented.Ifyouarestillmotivatedatthispoint,youareeitheraCaucasian
maleMBAstudentatHarvard,orhavetheambitionandrisktolerancetonotbe
deterredbythenumbersandheavycompetition.Eitherway,Iwouldsaygetinto
thegame,rollthedice,andseewhathappenswhenpreparationmeetsopportunity.