Steve Jobs of Apple fame does not seem to be impressed by venture capitalists and once said VC "sounds like a bullshit job to me." Ironically, this was reported by none other than Michael Moritz, who was then a journalist and now is a venture capitalist and Chairman of Sequoia Capital. Of his own experiences as a VC, Mortiz would say, “Every day is composed of a hundred soap operas - it’s an exhilarating place to live and work”
As a venture capitalist, you are not creating anything new, but rather fuelling the creation of new innovations and businesses. Often regarded as a commodity, a VC is often compared to a role of a slick glorified financier – most of whom take credit for the entrepreneur’s successes. And hide their losses or blame it upon others. Here is a list of some other challenges of this business -
• Emotionally and intellectually demanding, a business of thousand “No’s”: The business calls for the ability to handle multiple investment opportunities, complex, and pressing situations; to maintain your drive and discipline; to prioritize tasks; and to be comfortable with ambiguity. “I have stopped trying to manage my calendar,” says Jack Ahrens, a VC of thirty years, “rather I keep a prepared mind for emergencies that may arise on any day.” It calls for a mental tenacity—not becoming exhausted by the times you must say no, turn people down, or throw water on someone's great idea without being abrasive. Entrepreneurs, particularly those who did not make it big due to paucity of capital, look at VCs as vultures, or worse, jerks.
“I’ve heard entrepreneurs say “I don’t want to talk to that firm because they are such jerks.” In almost all cases these are well-known, older firms who come from the era when capital was scarce. Every experienced entrepreneur I know has a list of “toxic” VCs they won’t deal with. There are still plenty of VCs to pitch to get a fair price for your company and only deal with decent, helpful investors. It sounds kind of crazy, but being a reasonably nice person has become a competitive advantage in venture capital" --- Chris Dixon, Partner, Andreessen-Horowitz
• Churn: Once you get in, staying in the business of venture capital is easy only as long as you can generate superior returns. Successful practitioners continuously need to adapt themselves over economic cycles. Be prepared to be voted off the island—your numbers will tell you when it is your turn to leave.
• Performance of partner: The one and only measure of the business: returns are a function of capital invested and time. Time is your enemy - as the clock keeps ticking, the measure of performance – Internal Rate of Return (IRR) is a function of time, keeps dropping. Worse, in bad markets and recessionary times, the ability to exit an investment slows down, not to mention the potential value of the return. But investors really don't care for any excuses. As Roelof Botha of Sequoia Capital said of what keeps him up at night, “Suffice it to say that you’re only as good as your next investment.”
• Performance of firm: In a world of one-hit wonders, consistency matters. Top-tier venture capitalists who generate returns over funds get to raise funds quickly, charge higher profits—as much as 30 percent, as opposed to the standard 20 percent. Marc Andreessen once said, "I don't believe there is such a thing as a VC industry. There are about forty firms that really do well as investors and over six hundred firms that will break your heart as an investor. A handful of firms generate all the returns and a lot of firms want to generate those returns."
“Only a small number of startups are meant to be successful. The same goes for venture firms. I expect most VCs to fail. The entire business is about finding exceptional, awesome companies. If you find one of them every five years, nothing else matters" --- Mike Maples, Floodgate Fund
• Market forces: At times, changes in market trends can hurt highly specialized firms. Not too long ago, cleantech investments were at an all time high. As the waves receded, the green practitioners had to tweak their resumes. Some repositioned themselves as generalists. Others went back into the technology sector and sought “clean web” opportunities. Often, when technology / software investments are on the upswing, life science sectors take a beating. Technology sectors have a shorter path to exit while the time horizon of life sciences investments is longer, often mired with technological, regulatory and financial risks.
• Patience in financial returns. What, no carry? Of the 8,000 practitioners in the business in the United States, very few have seen any financial profits, or as they say, a ‘carry check’. In other words, most practitioners have survived on salaries, coming from management fees. This is yet another cause of heartburn for LPs, who think such perverse incentives are misaligned.
• Intellectual honesty (or lack thereof): Any limited partner (LP) will regale you with stories of bad VC behavior. But at its very core, what irritates these investors is how VCs play around with numbers to bloat their performance. It’s an age-old tactic – slice and dice the data to make sure your performance looks good. And then find the next sucker who can invest in the fund. VCs, with their inflated egos, hubris and biases rarely do a mea culpa. No VC in their right mind will say “We lost your money and we learned a few lessons.” Often, VCs blame someone else for poor performance. Several limited partners used terms like ‘disingenuous’. FLAG Capital, a fund-of-funds summarized it as the Lake Wobegon effect, where in a VC land, all the women are strong, all the men are good looking, and all the children … [add venture capitalists here]…are above average.
The VC business is subject to pressures from multiple ends: the supply of capital, the availability of investment opportunities, liquidity time frames, and regulatory dynamics. Elizabeth “Beezer” Clarkson, Managing Director of SAP Ventures says, “Often, you don’t know if its you or its luck. Having humility is essential.” In any career where those two imposters of fame and fortune prevail, you can be assured of petty politics, backstabbing and opportunistic behavior. As they say, the business of venture capital is not for the faint of heart.
At its core, venture capital is truly an apprenticeship business. It takes years of mentoring to learn how to assess investment opportunities, set pricing and strategy, build and motivate management teams, deal with inevitable and unpredictable threats to the businesses, source additional capital and strategic partners, and, finally, divest (for better or worse) these illiquid investments. “The good ones view it as a calling, not a career” says Diana Frazier of FLAG Capital Management, a fund-of-funds with investments in some of the leading venture funds.
Singer Bob Dylan once said, “I accept chaos. I’m not sure it accepts me.” That sums it up nicely - you can accept venture capital, but will it accept you?