Picking a VC is hard. You don’t really have much to go on to decide who would make a good fit. Reputation of firm? Of partner? Deals done in your industry? It’s a bit of all of these.
I had an enjoyable conversation this morning with a young team straight out of college this morning and they were calling to ask advice on how to approach fund raising (angels vs. VCs, how to select a VC, etc.) and I realized that without years of experience it is tough to answer this question.
So I thought I’d write about out with what I would look for in a VC knowing what I know now and why.
Most VCs are book smart. It’s insanely competitive to get into our industry so most have degrees from institutions like Stanford, Harvard, Wharton and University of Chicago (blatant plug ;-). Smart is simply not a differentiator. In fact, book smart can be a negative. The last thing you want is a know-it-all telling you what to do when they are at 50,000 and haven’t had to deal with your exact circumstances.
I call them “VCs Seagulls.” (you know … fly in, shit on you and then fly away). VCs should be more of a coach than proscriptively telling you what to do. I’ve seen too many companies go off track by a VC hell bent on the team pursuing the VCs strategy which at times is about chasing the next shiny object.
You want a VC who will spar with you but then STFU and let you get on with things. Smart? Sure. But don’t over index on brains. In the end it will be up to you to figure out what to do. If you’re looking for somebody else to tell you the answers you’re in the wrong business.
You could look for a VC who has huge wins under his or her belt and therefore has a formula for success. The problem with this is that past successes aren’t always relevant to future ones as the methods and environment of the past may no longer apply. Think of web vs. mobile. Traditional software vs. SaaS. SEO marketing vs. social marketing.
The other problem with extreme success is that for some VCs it makes them disinterested in middling outcomes, things that take a long time to incubate or solving thorny problems when a company doesn’t immediately move up and to the right. To be clear – I’m not saying huge successes make a VC less likely to be helpful to you – I’m just saying it’s not a guaranteed predictor.
Of course it is super helpful if a VC can drop you in to important people for business development, recruiting, PR, sales and eventually M&A. In fact, I’d say that “ability to connect you” is one of the things that VCs sell the strongest in the courting process with you. In my experience 90% of VCs fall short on their promises of how helpful or not they can be with intros. If you find the 10% that have the Rolodex and work it hard on your behalf then these people should be on your short list. I would call their portfolio companies and ask how helpful or not they’ve been.
I think connections are important but for the most part I think you’ll find that you end up making your own success and an outcome of success will be much more tightly correlated with your work effort than the intros you got.
Industry or Operating Experience?
Now you’re talking. I’ve sat on ad tech boards with board members who clearly knew little about impressions, fill rates, CTRs, RTB, eCPMs or the difficulties & opportunities of embedded mobile SDKs vs. HTML5. It felt like there was a wavelength with management and somebody wasn’t on it. I’ve been involved with SaaS companies with VCs who don’t understand demand generation, lead qualification, sales coverage ratios, sales forecasting or frankly when deals should be inside sales vs. outside sales.
I would think it would be a big fucking nightmare to have a VC on my board who simply doesn’t get what I do and yet my perception is this happens often. I know many VCs who don’t have operating experience and frankly some of them are fantastic. Simply put – I’d be in search of a VC who had an intuitive sense of my product, my customers, my organizational issues, my competitors, etc.
EQ and Team Leadership?
Nail on the head. This is what I would look for above all else. I wrote about this a long time ago and if you didn’t read it I highly recommend it. In my opinion the primary role of a VC is chief psychologist. Frankly, this is even the most important attribute in deal selection for a VC. When you look at a deal so much of what you’re trying to understand are the skills, resiliency, work ethic, motivation and team dynamics of the founders. Nothing blows up great opportunities faster than founders who are constantly fighting. And let’s be clear – in almost every company there is executive management fighting. Google. Twitter. Facebook. FourSquare. SnapChat. Everywhere.
Politics are a part of human nature and thus a part of all startups. The sooner you accept that you can lose your neurosis that somehow your company is dysfunctional and everybody else’s runs smoothly. As I like to say “Startups are all naked in the mirror” (we see our own flaws but see everybody else in their Sunday best.)
I think of VCs as coaches. You’ve got the team on the field and ability to trade players or draft players when need be. But successful coaches find a way to get the most out of all the existing players on the field and avoid too much unnecessary trading. You might pick up a great three-point shooter but have no idea how that players attitude is going to leak into locker-room drama.
I see some VCs who are quick to chuck aside a founding CEO who hits a bump in the road. That’s disheartening. I see some who either don’t realize they need to step in and mediate when issues arise or know that it needs to be done but lack the skill or the will to do so.
So common are founder tensions that my intervening is a weekly occurrence and it’s so common that if I ever write about it I’m sure that instantly every company I’ve invested in and every company in which I’ve been an informal advisor thinks I must be writing about them. It’s not you. It’s all of you.
Whenever you create a team of super motivated people doing anything you’re going to have egos, rivalries, extreme performance, mistakes, slumps, alcohol, depression, anger, failures, insecurities, differences of opinions and control issues.
It’s my job to know what makes you tick. It’s my job to know who’s performing and who’s not. It’s my job to read the tea leaves on internal rivalries, power struggles, blockers, etc.
I do a lot of listening. And asking. And probing. I try to triangulate and get multiple people’s points-of-view. I try to bring solutions when appropriate. I try to adjudicate fairly when asked. I’m not afraid to help make difficult decisions. And I’m not trying to be everybody’s buddy or be loved. It’s my job to be respected by acting honorably and fairly and occasionally doing difficult things.
Knowing whom to back within an organization that is feuding and when to back them is one of the hardest things about our job. Just like CEOs, we need to take in lots of different opinions and data sources and triangulate. And in the end we must trust our own judgment.
VCs with high EQ get this. VCs with high IQ but low EQ often do not.
Helpfulness / Availability
There are times you just need help getting shit done. A VC isn’t an extended member of your team but they can be very helpful in spot situations. I’ve watched VCs help with valuation support (spreadsheets, comps) on next round financing, participate in M&A meetings, interview senior job candidates – even help terminate tricky senior hires. I’ve seen other VCs who seem to never have time to get their hands dirty.
I’ll let you decide which you’d want.
Startups are hard. And so is venture capital. Neither class of people should give up easily. Sadly I think VCs often quit to early. If I were looking at which VCs to choose I would reference strongly for which ones are supportive in good times and bad. The worst thing that can happen to you is to have a VC who loses confidence and mentally checks out.
Fred Wilson wrote perfectly about sticking with struggling investments.
So finally, how do you know if your VC will stick by you in good times or bad? How do you know if they’ll intervene in a positive way in conflict? How can you tell if they really are good at intros and follow through on what they say they’re going to do.
The best way – of course – is to reference check. Here’s how you reference check a VC (link to post with longer version)
- look at their portfolio list
- subtract out the super, crazy successful companies. a) they have no time for you & b) everybody who has a super successful out-of-the-gate company loves their VC because there was no conflict.
- call the companies that are doing well but not yet household names. Ask about the criteria above.
- more importantly, call the companies that struggled. You’ll learn most about VCs when you find out how they handled themselves in tough situations. Make sure to call 3-4 members of the management team to avoid one person’s bias
Summary: Team Leadership skills, operating knowhow and industry knowledge are all tremendously important. Most entrepreneurs I encounter seem to make their decisions more on perceived brand, past successes and ability to intro. These decisions are always nuanced – make sure your thought process is as well.