ou have spent years accumulating what you think is the right experience to break into VC. From the traditional stepping stones like investment banking, management consulting, and top-tier MBA programs to your impressive thought leadership on social media, you genuinely feel you have all your bases covered.
Yet despite your impressive pedigree, every second job description you come across in your pursuit for that coveted “VC Associate” position contains a line or two that continue to leave you feeling deeply inadequate and underqualified. This fatal parable usually looks something like this:
- “1–3 years experience in Software Engineering or Data Science at a venture-backed startup”
- “1-2 years of professional experience in an emerging startup in roles in growth, operations, and go-to-market”
- “Entrepreneurial empathy: ideally gained through 5+ years experience in fast-paced environments like tech startups”
- “Deep understanding of, empathy for, and experience with, the zero-to-one entrepreneurial process - you quite likely have been a co-founder or early employee at a startup company and have ideally been involved with a successful fundraise or two”
That’s right – the crucial piece often missing from the puzzle is so-called ‘operating experience.’ This lack of hands-on operational involvement can raise eyebrows in a field where being a successful entrepreneur is seen as a key asset. In this exploration, we dissect the significance of operating experience, its appeal to venture capitalists, and the counter-arguments that challenge its necessity.
Decoding ‘Operating Experience’
Operating experience, in the context of venture capital, refers to hands-on involvement in building, scaling, and managing a startup. It encompasses the empathy gained from having either directly experienced or seen at close proximity the challenges faced by entrepreneurs on a daily basis – from making critical decisions impacting the livelihoods of teams to navigating the tumultuous trajectory of a growing business. This experience provides a unique vantage point, allowing individuals to understand the nuances of product development, customer needs, and the relentless iteration required for success.
Why VCs Crave Operating Experience
Venture capitalists covet operating experience for a multitude of reasons, each adding to an individual's ability to contribute meaningfully to the success of portfolio companies.
- Lessons Learned and Sounding Board:
Founders stand to gain from the hard-won lessons of those with operating experience, transforming them into invaluable mentors and sounding boards for navigating operational challenges.
- Scaling Prowess:
Individuals boasting operating backgrounds comprehend the intricacies of efficiently scaling a business, a skill paramount in the dynamic and fast-paced environment of startups.
- People Management and Hiring Expertise:
Operational experience equips individuals with the capability to manage people effectively and make strategic hires, imperative for constructing high-performance teams.
- Deep Market Understanding:
Operating experience endows individuals with profound insights into relevant markets, business models, and competitive landscapes. This knowledge facilitates anticipating and mitigating the forthcoming set of challenges.
- Empirical Evidence of Value Addition:
Studies suggest that VCs with operating experience contribute more value, generating halo effects, leveraging networks, and providing crucial operational insights.
- Founder Empathy and Proactive Empowerment:
The unique ability to step back and proactively empower founders is a distinctive trait stemming from a profound understanding of the entrepreneurial journey.
- Influence on Boards and Investors:
Those with operating experience can exert significant influence on boards and among investors, particularly when interacting with counterparts lacking practical insights.
- Developed Relationships and Networks:
Operating experience nurtures the development of relationships and networks crucial for securing deals in the fiercely competitive venture capital landscape.
- Understanding Leadership Styles and Team Dynamics:
Having witnessed diverse leadership styles and team dynamics, individuals with operating experience excel at evaluating and motivating teams.
- Preference of Entrepreneurs:
Founders often gravitate toward VCs with similar backgrounds, fostering a deeper connection and understanding between the investor and the entrepreneur.
- Navigating Subjectivity in Startups:
Financial understanding alone is often inadequate in the subjective world of startups. Operating experience provides a nuanced perspective for evaluating opportunities.
Counter Arguments: Challenging the Operating Experience Imperative
Despite the compelling arguments in favor of operating experience, there are just as many counterarguments challenging the notion that it is an indispensable requirement for success in venture capital.
- Success as Founders vs. Career VCs:
Empirical evidence suggests that VCs who did not achieve success as founders may go on to become even worse investors than their career VC counterparts.
- Cultivation of Operational Empathy:
Operational empathy, a key trait associated with operating experience, can be developed irrespective of whether an individual has worked in a startup or not.
- Humility of Non-Operators:
VCs who lack operating experience often bring a humility that acknowledges their non-expertise, fostering respect for founders and their unique challenges.
- Diverse Paths to VC Success:
There are numerous examples abound of individuals finding success in venture capital through alternative pathways, such as angel investors, consultants, writers, and podcast hosts.
- Preserving Strategic Independence:
Former operators may inadvertently believe they hold the secret to building a successful business, potentially limiting strategic flexibility.
- Effective Application of Experience:
The value of operating experience is contingent on its effective application. Mere experience without insightful application may not yield the desired results.
- Staleness of Operating Experience:
Operating experience may lose its edge after a few years, especially if not continuously updated and applied in evolving startup landscapes.
- Broader Relationships in Tangential Industries:
Non-operators may have broader relationships in peripheral industries, providing a unique perspective beyond the confines of a single sector.
- Industry Insight from Non-Operators:
Individuals without operating experience may accumulate industry insight through extensive work on specific investment themes, drawing lessons from various companies in a vertical.
- Value of Finance Backgrounds with Scale:
As investment rounds increase in size, VCs with finance backgrounds and the networks that accompany them become increasingly valuable.
- Investing Experience's Impact:
Empirical evidence suggests that VCs with prior investing experience make better investments due to connections to investor syndicates and access to high-quality deal flow.
What Truly Makes a Good VC?
Beyond the debate on operating experience, what defines an outlier venture capitalist? The essence lies in a combination of skills that transcend specific pathways.
- Instincts Honed through Experience:
The leading VCs possess instincts honed by diverse experiences, allowing for effective pattern recognition and decision-making.
- Versatile Technical Skill Set:
The ability to quickly and accurately size up situations, draw effective conclusions, and apply their sales, finance, and consulting skills.
- People Skills and Intellectual Curiosity:
The importance of being a good judge of character, including listening, recruiting acumen, and qualitative analysis, cannot be overstated. Intellectual curiosity, sound judgment, a risk-taking attitude, and coaching abilities also contribute to success.
Conclusion: The Varied Routes to Venture Capital Success
Unfortunately, as we have shown, there is no one-size-fits-all formula for success. Aspiring venture capitalists often find themselves grappling with the ideal set of experiences that will guarantee triumph. However, the reality is more nuanced.
Advisers, regardless of their background, are ultimately advisers—they cannot build businesses for entrepreneurs. The quest for a defined set of experiences that make a great VC remains elusive. Instead, success in venture capital boils down to skills, encompassing the ability to manage ambiguity, strategize through operational complexity, and raise capital.
In conclusion, while operating experience undoubtedly offers unique advantages, it is not the sole determinant of success. The dynamic nature of the industry requires individuals to draw from a broad spectrum of skills, irrespective of their chosen pathway into investing. As the ecosystem continues to evolve, the essence of a successful venture capitalist lies in adaptability, a keen understanding of market dynamics, and the ability to navigate the ever-changing currents of the startup landscape. If you’re battling with the conundrum of whether to get a job at a startup first or try to go straight into a VC fund, perhaps it makes sense to reframe the decision in terms of how you think you can most efficiently obtain the desired skillset.
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