Is everything we know about what makes a good VC just wrong?

By Sarah Lacy , written on July 4, 2014

From The News Desk

What I’m about to write is heresy in a least some of the circles I run in. It’s a good thing it’s a holiday: Hopefully all my uber-successful billionaire Valley pals are off on boats or at vineyards.

The only ones at work are you and me, fellow struggling entrepreneur. Those of us staring down the barrel of dwindling cash reserves, locked in the full-on throes of the struggle, who laugh (or weep) at the idea of a BBQ today.

So since we’re all in this together, let me ask you: Are you also wondering if there seems to be zero correlation between experience at running a company, and being a great investor?

Every since I've been in the Valley, VCs have talked up the importance of having "operating experience." In recent years that's swung to a zealot’s position that the only good investors are the ones who have actually founded and run companies, rather, say, than merely being a mid-level executive at Yahoo or, god forbid, a Wall Street banker or analyst.

I don’t know who started this meme, but I’ve heard it over and over again in the last year:

If you were on a lifeboat and you had Reid Hoffman, Marc Andreessen, John Doerr, Mike Moritz on board and had to throw two off, who would you pick? I’d take Hoffman and Andreessen because they’ve actually done stuff.
(To be clear, this isn’t a real lifeboat we’re talking about. Andreessen is a tall guy who could probably capsize a boat. In fact, if I were manning a lifeboat, I’d probably look for an experienced sailor, or someone who can catch fish. There’s little to no call for term sheets in the middle of the ocean.)

Still, I’ve heard that idea -- operational experience as the mark of a great investor -- countless times in the past twelve months.

As a founder, I resonate with everything everyone says about good and bad investors on an emotional level. I used to think entrepreneurs were too whiney about interfering board members and VCs. Guys, they gave you millions of dollars to build your dream with no obligation on the downside should you completely blow it and lose it all! You think they shouldn’t have a say in the company?

But I get it now. I can’t tell you how times in the past two and a half years I’ve said the words “easier said than done.” The worst conversations are ones where investors say something like: “Have you thought about hiring a world class sales guy?”

Oh thank you! Because I was planning on hiring a total shit sales guy! Now I’ll go with world class! Hold on to your hats everyone!

For many, the gap between success and failure is rarely a bad idea or road map. It’s that bitch called execution.

Easier said than done. I don’t say this to mock investors. The Chairman of Pando’s board, Andrew Anker, (who is also building a company now, FWIW) is effective because he regularly pisses me off by forcing me to look at realities I don’t want to face, nagging me about things I know aren’t working despite my best efforts.

It’s an inherent uneasy tension between the person who should be giving you dispassionate advice as a semi-outsider whether you want to hear it or not, whether it seems obvious or not, and the person who is the most emotionally connected to a business, bleeding into it daily. So you can understand the allure of the “hack” around this fox-and-the-hound dichotomy: Just raise money from someone who has already done it.

In a lot of cases, it works. Those two metaphorical lifeboat captains, Reid Hoffman and Marc Andreessen, are excellent investors -- I say this from personal experience. But I’m starting to realize that that’s more because they are thoughtful, questioning, and patient mentors, not solely because they previously started companies. The very act of having built a successful company doesn’t mean you’ll be good as a VC, and the very fact that you haven’t built a company doesn’t mean you’ll be a bad VC.

Again, this idea is heresy in the Valley right now.

But look at the two people many consider to be amongst the Valley’s best investors historically: John Doerr and Mike Moritz. Ok, you may counter, that was some bygone era when fewer former entrepreneurs were investors. So now look at some of the other of the top investors today: Fred Wilson, Mike Maples, Kirsten Green, David Sze, Bill Gurley, and Bijan Sabet. Also not former CEO-entrepreneurs -- and yet, they've invested in many of the hottest companies of recent years like Twitter, Tumblr, Facebook, and LinkedIn and the hottest companies right now including Snapchat, Uber, Lyft, Warby Parker, Snapchat, and dozens more.

(Reminder: Sabet is our guest at next week’s PandoMonthly in New York. A few tickets are still available here.)

Those companies have their picks of investors. Clearly these non-founder VCs are doing something right.

Wilson had a great take on this at our sit down with him last year. He explained that while he lacked a lot of first hand experience of what his entrepreneurs were going through, he also never had the illusion that he could do their job.

Andy Rachleff had a similar take saying that a VC and a CEO are just totally different skills sets. He had storied career as a Benchmark partner before he turned CEO of Wealthfront. He recently passed that job onto Adam Nash and was downright gleeful, saying, “I know my limitations. I was meant to be a VC.”

“Founder friendly” simply doesn’t always mean you’ve done it before. The truth is far more complex.

There’s an important point for anyone raising money now in what Wilson says. Frequently, a VC who has had success will overly extrapolate from what happened to them and try to apply it to every startup they touch. Or worse: They will fall in love with an idea and think they can fix the things that are imperfect about it. I have spoken with a handful of entrepreneurs-turned-VCs in the last year who have said they’ve fallen into that particular trap and now actively guard against it. Many others exhibit the same inclination while being far less self aware.

There’s so much fear and uncertainty and dumb luck associated with trying to throw millions at an idea and make it into a company -- particularly in consumer internet where hits are unpredictable and binary.

Amid that chaos, hacker-minded entrepreneurs seek truisms to unlock solutions no one else has found. That’s where you get conflicting dogmatic advice like “only raise enough to get a minimum viable product out” or “raise as much as you can because you’ll need more than you think.”

The truth is much less comforting: Each company is completely distinct and there is no playbook.