The “Dumb VC” Controversy: Financial vs. Operating VCs

Last week a scathing post by Andy Dunn, the founder of Bonobos, entitled Dear Dumb VC,  generated some stiff controversy in the blog- and Twitter-spheres.  Serial entrepreneur turned venture capitalist Mark Suster, author of the superb Both Sides of the Table blog, weighed in with a long, fact-filled response, entitled As Populist as it May Feel, 98% of VCs Aren’t Dumb that among other things, challenges some of Dunn’s industry math assumptions.

As someone who’s run VC-backed startups for more than 8 years, raised more than $45M in VC, knows many VCs pretty well and several both in their pre- and post-VC incarnations, is an LP in a few funds, and who has both sat on boards and done advisory work to VC-backed startups, I thought I’d weigh in with a few opinions of my own.

The first is that the idea of the “dumb VC” is simply dead on arrival.  I have never met a dumb VC nor do I ever expect to.  To the contrary, VCs are always among the smartest, best educated people I have ever met.  Most of the folks I know have attended some combination of Harvard, Stanford, MIT, or Cal and have both undergraduate and MBA degrees.   Those who come from the technical side often have PhDs in engineering or computer science.  You may like them, you may hate them, you may agree with them or disagree, but let’s just kill right here any concept that VCs aren’t smart.   They are.  And usually very.  Thinking of them as dumb is both incorrect and isn’t going to help you work with them in any way.

I believe the big issue Dunn is circling is that of operating vs. financial venture capitalist.  Let’s define what I mean.

An operating VC is one who comes primarily from an operating background, typically someone who has founded or run one or more startups and brought them to successful exits, often scaling them massively in the process.  Operating VCs add value by drawing on their past experiences.  Entrepreneurs often prefer working with operating VCs because they feel they have walked in their footsteps.  The original VCs on Sand Hill Road were almost exclusively from operating backgrounds (and I think I once heard, the majority from a single fraternity at Stanford).  As one great, first-generation operating VC recently told me:  “venture capital was supposed to be a second career.”  Andreessen Horowitz is particularly vocal on this topic, frequently messaging that its partners are exclusively operators.

A financial VC is one who has limited operating experience and typically entered venture capital as an associate immediately after completing (Stanford, Harvard, MIT) business school.  They typically have undergraduate degrees from stellar institutions along with a 3-5 years of experience, perhaps in product management at a company like Google or VMware.  Life is tough for financial VCs at the start — a lot of them die off trying to work their way to partner.  Because they are both young and lack significant operating experience, few CEOs want them on their board.  For this reason, they are often paired with senior partners and on a good day the senior partner attends the board meeting with the associate.  Financial VCs typically work by “pattern matching” — i.e., they draw on their experience sitting across 10+ boards and look for patterns and best practices.

In recent years, I have observed a back-to-the-roots movement driving two key changes in how Silicon Valley works:

  • VCs are much more founder-friendly.  Founders are not seen as disposable CEOs who will inevitably be moved to a CTO role.  This reverses a prior decade leaning the other way, typified by EIRs seen by founders as CEOs in waiting (or lurking).
  • Operating VCs are more in fashion than financial VCs.

While there are many things I like about the back-to-the-roots movement, I think pendulum needs to be in the middle.  Yes, some of Silicon Valley’s most successful CEOs (e.g., Larry Ellison, Steve Jobs) were founders.  But also yes, some brilliant technical founders turn out to be terrible managers.  While the fathers of venture capital may have been heavily operating guys, some of today’s Kings of Sand Hill Road more closely match my description of financial VC than operating VC.

For example, John Doerr of Kleiner Perkins got his Harvard MBA in 1976, had six years of sales experience at Intel, and then joined the Kleiner in 1980.  Doug Leone of Sequoia had sales experience at Prime, Sun, and HP and joined Sequoia in 1988 after getting his MS in management from MIT Sloan.  While I don’t know John Doerr, anyone who wants to argue that Doug Leone is either dumb or can’t add value will last approximately 5 nanoseconds before evaporating into a puff of smoke.

Operating VCs are useful to the extent their operating backgrounds and the situations they faced are relevant to your company’s today.  However, they risk getting stuck in the past, doling out stale advice that worked 20 years ago but is irrelevant today.  Financial VCs are useful to the extent they have humility and offer advice based on the patterns and trends they see today.

In the end, the facts of the case are simple:

  • All VCs are smart — usually very.
  • Operating VCs add value in different ways than financial VCs.
  • All VCs, once they become your investors, are definitionally trying to help your company.

I want to close on the last point because the “dumb VC” post seems to miss it — whether you, as a founder or CEO, perceive the VCs on your board as actually helping, I can guarantee you that they are trying.  Rather than blaming them for their misguided efforts, I would direct you to this other amazing Both Sides of the Table post, entitled 8 Tips on How to Get the Most out of Your Board.

In the end, no one forces you to raise venture capital.   You choose to do so.  As part of that choice, you are taking VCs onto your board.  Like you, those VCs want to maximize the value of your company.  Your job as CEO is to work with them to do so.  If that doesn’t work in the end, it’s your fault — not the board’s — because as CEO your job is to work with your board to drive the company to the desired result.

One response to “The “Dumb VC” Controversy: Financial vs. Operating VCs

  1. Pingback: VCs are now risk averse | Mike Rogers

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s