Steel in Their Eyes—Why VCs should be Startup CEOs

11/1/11Follow @sgblank

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having some junior employee tell me why they couldn’t do something because of “how hard it was” didn’t get much sympathy from me. I knew how hard it was because I had done it myself. Startups are hard.

What running a company would do is give early-stage VC’s a benchmark for reality, something most newly-minted partners sorely lack. They would learn how a founding CEO turns their money into a company which becomes a learning, execution, and delivery engine. They would learn that a CEO does it through the people—the day-to-day of who is going to do what, how you hold people accountable, how teams communicate, and more importantly, who you hire, how you motivate and get people to accomplish the seemingly impossible. Further, they’d experience first hand how, in a startup, the devil is in the details of execution and deliverables.

My hypotheses is simple: what most VCs lack is not brains or rolodex or people skill, but hands-on experience as startup CEOs—knowing what it’s like trying to make a payroll while finding sufficient customers while you’re building the product. Sure, a year as a CEO won’t make them an expert, but it will change them quicker than 10 years in the boardroom.

Does it Matter?
There’s a school of thought that says the skill set of a great early-stage VC —awesome people skills, curiosity, likable, etc,— versus the attributes of a great entrepreneur—pattern recognition, tenacity, etc.—may not have much overlap. Early stage investing is not a spreadsheet, quantitatively driven exercise, nor is it about technology—it is a deal business and people drive the deals. And while having experience as a startup CEO may make you a better board member, it may not substantively contribute to your career as an early stage investor—which depend on many more important skills.

Steel in their Eyes

Ten years ago starting a company required millions of dollars and first customer ship took years. Now it’s possible to build a company, ship product and get tens of thousands of customers in a year with less than $500K. For venture firms who want to groom/grow associates or operating execs into partners (rather than hiring proven partners), here’s my suggestion:

  1. Have them start as an analyst (search for deal flow and people, due diligence)
  2. Then take a year as a product manager in a startup in the firm’s portfolio
  3. Then come back as an associate for a year—shadowing board and partner meetings
  4. Then take a year and $250-500K to start and run a mobile/Web/cloud company. See what it’s really like on the other side of that boardroom table
  5. Then return as a partner.

This process will create a new generation of venture capital partners, ones who have been battle tested in the trenches of a startup, hardened by hiring and firing, tempered by making a payroll and losing orders. They will never forget it’s all about the people.

These VCs would return to their firms with steel in their eyes. They’d be relentless about accountability from board meeting to board meeting with laser like focus on the one or two issues that matter. They would understand the CEO-VC-board dynamic in a way that few who hadn’t lived it could. They’d be ruthless in their choice of people and teams, looking for those few who have natural curiosity, a passion to win, and who won’t take no for answer.

Lessons Learned

  • Venture capital is still a “craft business”
  • Early stage VCs should have startup CEO experience
  • It can now be gained cheaply and quickly
  • It will give them perspective and edge that would take a decade to learn.

Steve Blank is the co-author of The Startup Owner's Manual and author of the Four Steps to the Epiphany, which details his Customer Development process for minimizing risk and optimizing chances for startup success. A retired serial entrepreneur, Steve teaches at Stanford University Engineering School and at U.C. Berkeley's Haas Business School. He blogs at www.steveblank.com. Follow @sgblank

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  • http://www.ohdata.com Andy Stewart

    Steve – This is a fantastic article, thank you for the perspective. I have had similar experiences in my career, and full-heartedly agree with what you’re saying here.

    The reality is that VCs are trailblazing a new professional field, and there are natural learning curves & corrections which occur. It is survival of the fittest, and many firms are struggling to adapt to the changing domestic AND global economies. The “incubator / fund / operating company” model appears to be the one rising to the top in my opinion.

    Having the ability to incubate, fund, and grow companies is where the real satisfaction lies…

  • Chris Noble

    I would say that VCs have been around at least since Queen Isabella of Castile financed Columbus’s new venture with a formal profit-sharing contract, after he shopped it around to all the other sources of risk capital in southern Europe.

    And I know successful startup CEOs who have been unsuccessful as VCs, and vice-versa. Interesting topic though, and some good points.

  • nanostring

    Chris, excellent point; notice that the business plan was to find India. Today, unfortunately, many VCs would not tolerate a changing business plan… #ovpventure, #idiots

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