Steve Blank: Why VCs Should Be Startup CEOs

“A man who carries a cat by the tail learns something he can learn in no other way.”
-Mark Twain

VCs who are serious about turning their firms into more than one-fund wonders may want to have their associates actually start and run a company for a year. Running a company is distinctly different from simply having operating experience – (working in bus dev, sales or marketing.) None of that can compare with being the CEO of a startup facing a rapidly diminishing bank account, your best engineer quitting, working until 10pm and rushing to the airport and catching a redeye for a “Hail Mary” close of a customer, with your board demanding you do it faster.

Today, you can start a web/mobile/cloud startup for $500,000 and have money left over. Every potential early-stage VC should take a year and do it before he or she makes partner. Over time Venture firms realized that the partners in the firms need a variety of skills:

  • People skills (ability to recognize patterns of success in individuals and teams)
  • People skills
  • People skills
  • Market/technology acuity (patterns of success, domain expertise)
  • Rolodex/deal flow (deal sourcing/ability to make connections for the portfolio)
  • Board skills (Startup coaching, mentoring, strategy, operational/growth)
  • Fund raising skills

Some of these skills are learned in school (finance), some are innate aptitudes (people skills), some are learned pattern recognition skills (shadowing experienced partners, hard won success and failures of their own), and some are learned by having operating experience. But none of them are substitutes for having started and run a company.

How to Become a VC

Early-stage venture capital firms grow their partnerships in different ways, some hire:
• partners from other firms
• associates and put them on a long career path
• venture/operating partners to get them into new industries
• an executive who had startup “operating experience”
• rarely a startup founder/CEO

In surveying my VC friends, I was surprised about the strong and diverse opinions. The feedback varied from:
• “.. because culture is such an important part of who we are, we will probably never hire a partner from another firm. The idea of bolting on someone from another firm is somewhat antithetical to who we are. We think that our venture partner role is the most likely path to general partner.”
• ..we have a partner-track associates program. We want to find someone who has a lot of consumer internet product experience as either product manager, founder, VP Product, etc. with 3-7 years of experience.”
• “…we do not even try to train new partners. We bring people into our firm who have learned how to be VCs at the partner level somewhere else and have demonstrated their talent in boardrooms alongside of us. We completely and totally punt on the idea of ‘training a VC.’ It’s an ugly and painful process and I don’t want to be part of it.”
• “…if they don’t have operating experience the odds of them knowing what they’re talking about in a board meeting for the first five years is low..”

Carrying the Cat by the Tail

When I finally became a CEO it was after I had spent my career working my way up the ladder in marketing in startups. By the time I was running a company, 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 firsthand how, in a startup, the devil is in the details of execution and deliverables.

My hypotheses is simple: what most VC’s lack is not brains or Rolodex or people skills – but hands-on experience as a startup CEO – 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.

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, quantitative-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 VC – which depend on many more important skills.

Ten years ago starting a company required millions of dollars and first customer ship took years. For venture firms who want to groom/grow associates or operating execs into partners (rather than hiring proven partners), here’s my suggested process:
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, and will never forget it’s all about the people.

These VC’s 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.

Steve Blank is an entrepreneur and backer of startups. Opinions expressed here are entirely his own. He also blogs here.

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6 Comments

  • [...] VC’s should be start up [...]

  • As an individual who is attempting to start a technology start up in the near future (still working out prototype bugs) I would love to see more VC’s with CEO experience. Not because I feel like I’m right and they’re wrong, instead so many people in my shoes look up to VC’s not just as a funding opportunity. We put a great deal of trust into someone who is willing to front that amount of capital, we need mentors because we want to see our company bring back just as high of an ROI as any VC does!

  • Mr. Blank makes good points. However, as a recovering VC, I would like to add that one turn at bat does not a hitter make.

    The funding landscape since the late 1990′s has changed greatly. Fund raising (whether as a GP or an entrepreneur) is evolving quickly. The old models and hence the old styles of partnerships must keep pace with changing markets and the dynamics of investors. My view is that the rotation for partners and associates should be ongoing; manage, operate, manage. Repeat. Look at how cloud/mobile changed the dynamic of building a business model and how the social/professional connection fabric has altered valuation models. A continuous learning and experience cycle will ensure that relevant skills are always at the table.

  • This is a great idea, and I couldn’t agree more with the importance of having real “buck stops here” “creating something from nothing” type experience as a founder in making someone a better VC.

    That said, I think it would be important that only a minority of associates sent out to start businesses would be offered the ability to return as partners. If there is any sense of there being a “safety net” of simply returning to their VC firm as a partner (in the event that the startup doesn’t work out), then the experience will cease to resemble that of a ‘real’ entrepreneur, and will thus no longer yield the expected beneficial results.

    I also think that for similar reasons, the timeline should be less defined than described above — the art of capital appreciation in the venture model is a delicate balance of: amount of capital vs. amount of returns vs. amount of time. If one of these three variables is fixed, it removes much of the complexity, and thus learning, from the equation.

  • [...] Steve Blank: Why VCs Should Be Startup CEOs [...]

  • Like others I agree that being a company CEO is a good idea. Having been in three start-ups, one as engineering manager and two as CEO, I also agree with the comment that one time at the plate doesn’t a hitter make. Third time was a charm.

    It is also interesting that while being a CEO helps in being a better VC, being a VC helps make a better CEO. While a relative neophyte as a VC (just over 4 years now), there are things I now understand that would have been tremendously helpful as a CEO. If ever I go back to being a CEO, I would like to think it would better next time around.

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