The four types of VC you’ll encounter as an entrepreneur
And how you decide who’s the best fit for you
A while back my colleague Thomas wrote an excellent blog post explaining why we’re currently seeing increasing firm focus and specialisation in the VC market. In that post Thomas urged entrepreneurs and management teams to understand what type of capital they are looking for and therefore what type of investment firm might be the best fit for them. Now, while “firm-fit” is clearly very important and will save any entrepreneur and team who have it lots of time and frustration, ultimately venture capital is a people business. In the end, navigating the bumpy journey of building a large and important company out of nothing takes a lot of collaboration, engagement and alignment, all of which becomes very difficult without the right personal relationships and dynamic between the management team, investors and advisors.
In fact, in research by the Judge Business School at the University of Cambridge, entrepreneurs were asked: “what are the most important criteria in selecting a VC?” The top criteria for entrepreneurs was “personal relationship with individuals at the VC firm.” In second was “alignment on vision” and “economic terms” third. The quality of a personal relationship is obviously determined by a myriad of factors, but based on my 20-year experience of operating at the board level of VC-funded companies, I would argue that it is actually possible to derive some VC archetypes that could be helpful for entrepreneurs and teams to refer to when selecting their partner of choice.
For the purpose of explaining this I will draw upon an analogy between building a company and producing a movie or a stage show. Hopefully the analogy is as self-explanatory to you reading this, as it is to me…
Few investors will disagree that the entrepreneur and team are the leading acts and legitimate stars of the show, but unfortunately there are exceptions. Working with a VC who wants to be the star of the show can be difficult and will distract lots of time and energy from what is important. A “star-VC” is typically recognizable by an inordinate and constant consumption of airtime — usually without any material contribution to advancing the agenda, a lack of interest in listening and paying attention to other people’s arguments and a difficulty in synthesizing different ideas and opinions into workable solutions. I honestly can’t think of a situation where this type of VC would be a good fit with any strong entrepreneurial team, so If you come across a VC who thinks he (in my experience it’s rarely a she…) is the star of the show I would just recommend that you walk away and move on to the next one.
The movie writer holds the pen to the script and thereby decides the narrative, plot, characters and important events. The VC equivalent to the movie writer is a person who is consumed by what the company does, the product and/or service, and the strategy it deploys for achieving success. Or, in other words, someone who wants to be deeply engaged in the plot and narrative of the business.
The “VC-writer” rarely engages in details around financials, legals and governance, but you can trust them to think strategically and often creatively about how to best compete and out-navigate your competition. Now, this can be a very valuable competence to have among your VC-investors, but the challenge arises when the “VC-writer” and the entrepreneurial team are out of sync with regards to company vision and strategy. This means the VC-writer is usually a good fit for first time entrepreneurs and teams who may not have substantial experience and therefore don’t have very strong opinions around product and strategy and are looking for intelligent input on this. The “VC-writer” can also add lots of value to more technically oriented teams who are looking for more commercial experience and nous.
In my experience the “VC-writer” is often less of a fit with seasoned teams who have deep domain knowledge in the market they’re going after. If you pair with the “VC-writer” consider that there is a risk of discussions on high-level strategic topics that, while intellectually stimulating, may detract focus and even create misalignment and confusion. In another word of caution I will also say that in my experience, the “VC-writer” (together with the VC-star) is rarely the one to lean on in tough times and could even completely lose interest in a company if it doesn’t develop in line with their high expectations.
Where the movie writer is responsible for the narrative and plot, the movie director is responsible for actually transferring the writer’s work into live action. This typically involves providing a lot of instructions and directions to the stars of the show as well as any of the supporting cast and crew (stage, camera, sound, lighting etc.). The VC-equivalent to the movie director is a person who typically has a lot of operational experience, often as an entrepreneur themselves, and preferably within the same field of business that the entrepreneurial team is tackling.
Having a “VC-director” on your board can obviously be extremely helpful as no top quality entrepreneur wants to repeat the mistakes of others or re-invent the wheel. So, the right match between entrepreneurial team and “VC-director” may absolutely help the team to move faster and avoid common pitfalls. Again though, the challenge comes when combining the “VC-director” with more experienced teams who are quite knowledgeable about the operations of their business and therefore can challenge the details of any input and advice they receive. In these situations there is a risk of endless ensuing discussions about minute operational details such as the particular call to action in an email campaign, or the exact percentage sales commission on second year renewals bookings say. All very important, but probably not at the board level, and for a commercially savvy and experienced team quite frustrating and possibly even patronising.
In my experience many “VC-directors” also tend to be prisoners of their own success and therefore try to explain the world through a lens that is tainted by experiences that may not be very applicable to the situation at hand and which puts the VC-director at the risk of appearing out of touch.
The producer of a show is the person ultimately responsible for the show becoming a success and living up to its promises, artistically as well as financially. In order to achieve this the producer will be involved in a myriad of different topics with the ambition to remove friction from the production process to allow the cast and crew to flourish. This can include recruitment of senior cast and crew members, fundraising, planning and budgeting, marketing, distribution, commercial agreements, community affairs and just about any task imaginable down to janitorial duties.
Just like the movie or show producer, the “VC-producer” will take on many different hats depending on what is needed in order to secure the success of the “show”. I like to think of her or him as a chameleon that changes colour depending on the context and surroundings. For teams who are strong in the writing and directing areas, or who may already have great “VC-writers” and/or “VC-directors” on board, the “VC-producer” is often a good fit and can help the greater team scale a company from promise to success.
Where the producer is less of a fit in my experience is with relatively inexperienced teams, or highly technical teams, who may need a lot of coaching and advice on detailed commercial and operational matters.
Ultimately, building an effective board is not very different from building a highly effective management team in the sense that you need different people who all bring different strengths and experiences to the table. Entrepreneurs and teams are therefore advised to build a team of board members and advisors who complement each other and who can all bring unique skills and experience to help the team execute successfully. When raising capital, what type of VC-personality to add to the mix will largely depend on the composition and individual strengths of your existing team, board and advisors. Hopefully the VC-stereotypes described here will help you to organise your thinking and know what to be looking out for.