HowtobeaVentureCapitalistwhenyougrowup…

JuddRogers

Judd.rogers@colorado.edu

April2009

Boulder,CO

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.