There have been ongoing discussions over past many years on the need for operating experience amongst venture capitalists. Predictably, even in India, the advent of “new breed of VCs with operating and entrepreneurial experience” has been well celebrated. Intuitively, entrepreneurs accept the value in having someone who has been through the company building experience themselves. In today's venture capital ecosystem it is very important for every General Partner to have the relevant operating experience, with the emphasis on ‘relevant’.
PEHubwire recently did some research on the topic and was unable to locate evidence that operating experience makes better venture capitalists. World’s most successful VCs are as likely to have operating experience as not. Making returns on investments is the key criteria of success in the venture industry, and that criterion seems to not care for operating experience. Operating experience is merely an attribute that someone has rather than an indicator of performance. Experience by itself (whether operating experience or venture capital experience) is not enough.
On the other hand, firms like Canaan continue to stick to the model of hiring partners with operating or entrepreneurial background. This is with the belief that these people would have better understanding of situations that startups face, and hence a better ability to navigate them. Apart from statistics that can sometimes hide more than they reveal, understanding of the business and the network within those industries seems critical to being able to discharge one’s role as a partner to startups. Very often, the financial understanding alone does not lead to the right decisions, especially in startups where there is a large component of subjective assessment.
I believe there is another dimension of this argument that makes it interesting – that operating experience by itself doesn’t count for much unless it is applied well. If operating experience leads one to focus more on tactical issues rather than strategic ones, it can serve as a disadvantage. The key for VCs is an ability to appreciate and understand operating environment, but their role seldom calls for operating interventions in the business. That is where their ability to focus on the big picture becomes critical. In my view, this still calls for a good understanding of the industry one operates in – however, that ability to synthesize and apply patterns is something that is also very typical of people from other disciplines such as consulting.
Ultimately, entrepreneurs make choices not basis collective statistics, but basis the specific opportunities (here, individuals) that present themselves. And if nothing else, venture capital is a profession that allows sharp association of individuals with their performance. In that sense, it is extremely accountable on a personal level. That is what makes it exciting! And that is what allows people from all backgrounds to take a shot at this profession and prove their mettle.