From Pieter Welten – Prime Ventures (@pieterwelten)

There are plenty of debates that discuss what makes a good venture capitalist (“VC”) and what the best time in your career is to enter the industry. Some argue for instance that entrepreneur venture capitalists (“EVC”) create more value and work with entrepreneurs in a more efficient way and therefore are ‘better’ VCs. You also often hear that you can only add value to a company after years of operational experience. I find these conversations very intriguing. I am also convinced that you can benefit from an entrepreneurial or operational background, other than getting more empathy from fellow entrepreneurs. However, I am not sure whether you should have such a background in order to become a (successful) venture capitalist. Let me explain why.
First of all, the business of entrepreneurship is in my opinion very different from the business of venture capital. We are a services business. We serve both our investors as well as our portfolio companies, which requires more and broader skills sets and experience as one might expect. As you can see in the graph below we need to focus on different aspects of the ‘venture capital circle’ in order to deliver a good return to our investors that might allow us to raise another fund. Many of those aspects are often underexposed in the discussion.
Picture Let me briefly elaborate on the various stages:

  • Fundraising Process: Investors (or Limited Partners) prefer to see, amongst others, a track record, visibility on (likely) deal flow, well-defined investment strategy etc.
  • Deal Sourcing: The average VC looks at hundreds to thousands of businesses and only invests in a handful. Good and high volume of deal flow is paramount to the success of any VC, but this requires a large and established network of entrepreneurs and advisors as well as good brand recognition.
  • Investment: Great companies will attract interest from many great investors. One should not underestimate competition and the importance of deal execution. Not always that simple to get in on fair deal terms.
  • Portfolio Management: Probably self-explanatory, but VCs can add value in different ways, e.g. advice on strategy, introduce key hires, support follow-on investment, share experiences, connect fellow entrepreneurs etc.
  • Exit: It requires experience to decide what is best time to exit and to whom, what a fair valuation is, when to start a sale pro-actively and engage with an advisor etc.

In my view, an experienced and successful entrepreneur doesn’t necessarily has all the knowledge, means and experience to successfully raise funds (no ‘investment’ track record), source hundreds of deals (it takes time to build a large network), negotiates a good and sensible deal and knows what’s the best time to sell a portfolio company (maybe only sold one business, his previous one) for instance. That brings me to my second point.
In my opinion, it requires a high level of cooperation between the team members of a VC and about picking the right combination of people in order to become successful as a fund (i.e. deliver a great return). Like in sports teams (disclaimer: sorry, I often refer to sport because I love it!) enduring success depends on team effort. Successful VCs operate in a similar fashion as a football team (or ‘soccer for my US friends). If you have only defenders (read ‘entrepreneurs’) in your team, it is going to be difficult to score goals. If you have only strikers (read ‘bankers and consultants’) in your team you will probably concede dozens of goals. So the discussions and focus of entrepreneurs should less focus on the individuals of a firm and focus more on the team. The right team balance will lead to success. Both the entrepreneur and investors will benefit of this success and in my opinion such team can be composed of people with and without operational experience who can be relatively young and old. In Johan Cruyff’s words: ‘Choose the best player for every position, and you will end up not with a strong XI, but with 11 strong 1’s.’