Recently at Flywheel Ventures, we completed the post-M&A escrow release for a successful liquidity event: the purchase of Astria Semiconductor Holdings, Inc. (doing business as Microprobe) by FormFactor, Inc. (NASDAQ: FORM). Financed with a single Series A round of capital from Flywheel, Intel Capital, Gemini Investors, and several family offices and angel investors, the team at Astria successfully grew the MEMS-based semiconductor test equipment company to over $100 million in annual revenue and significant positive cash flow prior to its acquisition. Along the way, I was pleased to serve as the Chairman of the Board of Directors, along with Dr. Mike Slessor, CEO; David Millet, a Managing Director of Gemini Investors; and independent directors Dr. David Lam (founder of Lam Research) and Gidu Shroff (former Intel manufacturing executive). While the board and the company made our share of mistakes, we worked well together and got enough things right to demonstrate leading-edge product innovation in an R&D-intensive industry sector, as well as corresponding market share growth and a textbook “hockey stick” of financial results. Of course, most of the credit is due to the management team’s incredible investment of (to paraphrase Churchill) “blood, toil, tears and sweat.”

Of course, it doesn’t always go so well. In the venture business, the well-known rule of thumb is that for every 10 portfolio company investments, only 2 or 3 will turn into substantial “home run” outcomes like Astria. Another 2 or 3 investments will produce positive returns, but with low enough multiples on invested capital that the final returns will not justify the risk and time that was required. The remaining 4-6 investments will typically result in a partial or total loss of invested equity capital.

And that’s if things work out successfully.

Over the course of more than a decade and many dozen investments at Flywheel, I’ve put in my so-called “10,000 hours” per Malcolm Gladwell’s advice, and I’ve begun (I think) to learn a few things about venture investing. In no particular order, here are a few of them:

· Decision-making trumps productivity. Prior to becoming a venture capitalist, I served as an engineer, technical team leader, and then a founder and/or executive at several venture-backed companies. In those roles, the work ethic of my rural midwestern upbringing served me well. Often, success was directly correlated with a combination of long hours, high productivity, and sheer perseverance. Not such much with VC success, in my experience. Instead of the sheer volume of work output, what really matters is the quality of my decision-making — and there are only 6 to 12 decisions each year that really, truly matter. As a result, over time I have begun to focus more on my own mental, physical and emotional readiness to make the highest-quality decisions possible.

· Weeding the garden matters more than choosing which seeds to plant. Follow-on funding decisions are more important than initial decisions. This one caught me by surprise, given that VCs, entrepreneurs and the media all seem to focus (at least in public) on the topic of “how to raise VC financing” or “how to select portfolio companies.” It turns out, though, that once you’ve made a few initial VC investments, it becomes reasonably straightforward to distinguish the top tier of highest-potential entrepreneurs. As a result, a VC’s most promising portfolio company is usually the one they most recently funded. The really difficult decisions, however — the ones that seem to matter more to long-term venture portfolio returns — are those that require choosing winners and losers before the outcome is clear. The challenge is that every entrepreneurial company undergoes its own unique set of challenges: market timing, product iteration, customer development, team alignment, and cash flow constraints. Some challenges turn out to be mere barriers along the way to eventual success; others are the proverbial canary in the coal mine, providing early-warning signs of eventual failure. Deciding which is true, when you don’t yet have enough data to know for sure, is agonizing — and essential.

· The role of player-coach neither works in baseball, nor in venture capital. Many VCs believe that prior operating experience, particularly in entrepreneurial companies, is a critical ingredient to success in the investor role. Certainly, there are many advantages that have been well-detailed by others. The danger, however, is to presume that one’s own entrepreneurial experience provides anything more than a single set of context-specific data points that may or may not be useful to a specific portfolio company. Over time, I’ve come to believe that one’s own conventional wisdom about specific operational matters (which marketing channel is best for a specific type of company; what type of background makes the best CEO, etc.) is usually long on convention and short on wisdom. Only the players on the field — the entrepreneurs — have enough accurate data points about what is really happening in this market, with this product, at this time — to make quality decisions. The best role for a VC with operating experience is act as a coach, helping the players on the field think through how to make the right decision based on the experience, data, and understanding that only they can collect.

· Sell intelligence and buy empathy. Being the smartest person in the room rarely translates to better outcomes, and often correlates with worse results. In my early career as an engineer, and especially my professional maturation in the “constructive conflict” culture of Intel Corporation, I was trained to focus only on analyzing the data and coming up with the “right” answer. That approach works well in situations where enough data is available to be statistically meaningful, and where the problem and solution are already understood well enough to focus on optimization. In most seed- and early-stage startups, however, the data is insufficient, ambiguous and suspect; the real customer problem is not yet properly framed or defined; and the solution is far too uncertain and immature to yield productive results from “optimization.” In these contexts, it has often been easy for me in my VC role to shift into demonstrating a superior understanding and interpretation of the (inadequate) data, and overly aggressively pushing my own specific ideas for optimizing the (immature) solution. The result has been a set of proposals that are “too clever by half.” Even when my analysis has been spot-on, I’ve often failed to bring along the entrepreneurial team with me in reaching the conclusion. Of course, human beings rarely implement other people’s ideas with the same passion and tenacity as their own ideas. As a result, by overly focusing on deploying my own intelligence, I’ve often inadvertently delayed the implementation of the ultimately-correct approach. Instead, I now believe that a more useful way of leveraging my prior operating experience and analytical skills is focus on relating to the day-to-day decisions, uncertainties, and stresses faced by portfolio company leaders. With this focus, I can provide useful guidance on how one might approach thinking through the solution to a particular problem, while leaving responsibility for identifying and implementing the specific solution to the entrepreneurial team. This relational ability — better known as empathy — helps build stronger trust between a VC and entrepreneurs; encourages entrepreneurs to share reality more openly with the VC, so that everyone has more accurate information; and facilitates a more collaborative approach to problem-solving between leadership and board members. As the saying goes, “No one cares how much you know until they know how much you care.” This is especially true because nearly all of the most daunting challenges in building a startup end up involving human beings — and when dealing with humans, empathy trumps intelligence, every time.

· The most important question is, “How can I help?” Venture capitalists are typically intelligent, confident, driven individuals. In moments of honesty, we may even admit that we like the self-satisfaction derived from the deference of others based on their belief in the golden rule: “He who holds the gold, rules.” But, like powerful leaders in any other human domain, if not careful, we may find ourselves surrounded by sycophants who provide only positive, inaccurate feedback. This can be deadly in combination with our own confirmation bias — the well-documented psychological tendency of humans to shift our attention to data points that confirm our existing hypotheses, and block out other contradictory information. We are, in short, constantly at risk of “breathing our own exhaust fumes.” The antidote, I’ve found, is to self-consciously force myself to pause more frequently, stay silent more often, and ask the leaders in my portfolio companies what they think we should do, and how they think I can be most helpful to them. Ultimately, venture capital is a service industry; my belief is that the most successful VC investors learn, over time, how best to serve.

Of course, I am no role model, just a student of my own career journey in venture capital. I have made, and will continue to make, my fair share of these and other mistakes. Over time, I’ve tried to make the same mistakes somewhat less frequently, and listen more to the lessons of others who have been similarly taught by their mistakes. Your mileage and experience may vary, of course. In the end, all I know for sure is that it is a privilege to provide resources and assistance to the talented entrepreneurs who are changing the world — and changing me. I set out to be the speaker, and found I was the thought; I believed I was the teacher, and found I was the taught.

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copyright 2014 — Trevor Loy