Are VCs with operating experience more successful?

Last week I had a meeting with a prospective limited partner (“Mr. X”) who is long time investor in venture capital funds. He’s extremely experienced, well respected, and has a phenomenal track record. He’s also very provocative, which always spices up a meeting like this.

As we were discussing the backgrounds of the various partners at Mobius Venture Capital, I made the statement that we all have had meaningful experience as entrepreneurs and technology executives (VP level or higher) prior to becoming venture capitalists.

X immediately asked me if I had any data to support my view that this was a good thing. He said “take the top 50 individual VCs (based on historical returns) and correlate their experience – what does it show?” I thought for a minute and ran through my head some of the great VCs I know. Before I reached a conclusion, X said “it’s random – totally random – there’s no correlation to performance.”

At first, this surprised me (I was about 50/50 in my quick mental sort when he answered for me). Then – as I thought more about it – I realized that operating experience is merely an attribute that someone has rather than an indicator of performance. Experience by itself (whether operating experience or venture capital experience) is not enough – I’ve certainly worked with some abysmal VCs who have a lot of “venture capital experience” (and I’ve also worked with some abysmal VCs who have plenty of operating experience).

I pushed on what he thought actually correlated with success. He responded that the great VCs he knew had a combination of incredible instincts honed by experience combined with the ability to quickly and accurately size up situations and draw effective conclusions. He labelled this “pattern matching” – which is a good phrase for this capability.

I think the combination is what is critical – neither operating experience or pattern matching alone is enough (e.g. “I’ve seen this before, but I don’t know what to do”).

  • It may very well be that pattern matching is the key capability, but a VC tends to have a lot more patterns stored in her brain if she has operating experience.

    I know that when I graduated from HBS, I didn’t know jack about building a successful company. That took long hard work in an operating role, combined with a lot of failures.

    Maybe some people can become successful VC partners with only McKinsey and VC on their resume, but those folks must be few and far between.

  • I think you’re right, Brad, in that experience–per se–isn’t enough. It’s attitude and intellect and, forgive me for this may be heresy, emotional intelligence.

  • I’d say there is a third factor that’s pretty key as well, in addition to pattern matching and operating experience — deep knowledge of the relevant sector. In my experience, any two of the three in combination make for a great VC.

  • Dave Jilk

    It appears that fund manager X was claiming that operating experience is relevant, but only in regard to pattern matching and NOT in regard to advising companies on how to operate. That’s both interesting, and I think, correct.

  • I think the real success indicator for any VC is simply this: are they an idiot?
    Lemmings do as lemmings do…or something like that.

  • I have heard that comment from Limited partners before as well. Actually the follow up to it when you ask them what does coorelate, is that the only factor that has been shown to coorelate is partnership stability. Do the partners get along over the long term. Is there a sucession plan. How does the partnership deal with disagreements over time? That makes sense to me. VC business is a partnership among smart people. It is hard to get them to agree. It is hard to get us to do impartial self evaluations of performance. If a VC does a good job of these things over time, his performance will reflect it.

  • So how does a new partnership convince LPs to invest? The question is rhetorical for me since I’m “retired.” Still, if there’s an LP reading this…what does go through your mind?
    I think Martin’s point is excellent…but how do you rate a new partnership?

  • Ed

    shareholder value would be the most objective measure of a “great” VC, but is a passive shareholder (without a board seat) that scores the tenbagger the same as the active one that coaches a company from one to tenbaggerdom? I think not! Separating the portfolio management function from the operating (board) function allows for a clearer comparison: the “operators” should sit in a different category and be judged separately.

  • Paul

    It seems to me that there are two distinct parts of the VC’s job. The first is to make good investment decisions. I believe pattern recognition (or pattern matching) is perhaps the most talent for making good investment decisions. I believe it is difficult for even the best operators who have not been VCs for a long period of time to be good at pattern recognition. The second function of the VC is what I call “company building”–helping the management build a great business and a great company (which are two different things). I think it is difficult to succeed at company building without significant operating experience and ideally good knowledge about the domain. I think the best VC firms have VCs with sufficiently long experience as operators and VCs to be good at both aspects of the job, or marry the talents and perspectives of the experienced VC and the experienced operator (a tougher task, I would submit).

    There was an excellent book published by the Harvard Business School Press a few years ago that was (inaptly) titled Done Deals. The contained short profiles of about 50 leading VCs, including the pioneers of the industry. The heritage of the industry was that VCs were engineers. The advent of financially oriented VCs is a fairly recent phenomenon–over the last decade or so. The book is worth skimming for those interested in this subject.

  • Here’re some thoughts from a CEO/entrepreneur�s perspective:

    I think it’s probably fair to say that operating experience is only important in a VC if that VC is going to be helping with the operations of the companies in which they are investing. This assumes, of course, that the management team has operating experience from which they can draw elsewhere.

    The operating experience of an individual VC, or the lack thereof, is probably only important when viewed in the context of the entire BoD. My guess is that VC’s with little or no operating experience, who are nevertheless successful, tend to surround themselves with other BoD members who do have deep operating experience. They might do this by finding other VC’s with relevant operating experience to co-invest, but it’s more likely that they take the time to recruit independent BoD member(s) with deep relevant operational experience in the company�s space. They might also focus more heavily on CEO recruitment, with an emphasis on operating experience, as well.

    If anyone can go through a mental list of top VC’s, and look at the ones who are successful despite a lack of operating experience, my guess is that you will find a well balanced board for each of their portfolio companies (though I don’t have enough BoD visibility to vet this hypothesis any further myself).

    One thing is for sure: someone on the board has to have enough relevant operating experience to oversee the company�s management. It�s probably either one of the VC�s or someone they take the time to recruit.

  • Venture capital

    Back in early 2003, Oliver Curme of Battery Ventures wrote an insightful and near-prescient thought piece on the future of venture capital and investing in IT. It was quite well thought out and made some astute observations…his argument basically went

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