Not All VCs Need Operational Experience. But They All Need Operational Empathy.
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Most VCs have never worked at a startup. In the UK just 8% of venture investors have startup operational experience, according to data from a 2019 Diversity VC report. In the USA the fraction is higher, ranging from 20% to 30% across a random sample of funds. (It’s double that rate at top-tier firms.)
At first sight of this data one might think that we need more ex-operators working as venture investors, especially in the UK & EU where this element of diversity lags behind the more developed US ecosystem. However, it’s worth recognizing that operational experience doesn’t necessarily make a better VC, as a few notable investors have pointed out before, and as one preliminary analysis on the topic highlighted.
No doubt, operational chops have the potential to translate into more successful venture investing. A recent paper by economists Paul Gompers and Vladimir Mukharlyamov provides some evidence of this. In their research they found that founders who became VCs after a successful exit of their company do about 28% better than professional VCs at investing in successful companies. (Success was defined as a portfolio business listing on the stock market or being sold at a value higher than the total funding it received.)
The paper also attempted to untangle what contributed the most to this difference in performance. The researchers found that the outperformance wasn’t just down to successful founders having better deal flow or joining better VC firms when they became investors. The key factor, perhaps unsurprisingly so, was that these founders somehow added more value to their portfolio companies.
The paper doesn’t identify the mechanics of the value-add of successful founders, but it suggests that it may include a mix of halo effects (where people take interest in a company because a successful ex-entrepreneur name is associated with it), network value (where a successful founder helps recruit top talent or customers), and operational know-how (where a successful founder uses their experience to guide new startups through critical challenges.)
Tellingly, the analysis of Gompers and Mukharlyamov also found that VCs who did not exit successfully as founders actually did worse on their investments by 17% compared to VCs who had never worked at a startup (the “career VCs”).
Just because an investor was a founder or startup executive doesn’t mean that they’ll become better VCs. They not only have to be a good fit for an investing career, but the underlying quality of their experience, as well as how they leverage their credentials and networks to support portfolio companies matters more than the outward appearance of previous success or failure.
What are we to make of these mixed findings? In my experience as a VC-turned-operator, and work over the last two years as an angel investor, I’ve come to the conclusion that VCs don’t always need strong operational chops to do well by their portfolio companies. Instead, what they always need is strong operational empathy. What exactly does this mean?
Frank Slootman (currently the CEO of Snowflake) is a revered operator and had an IPO under his belt before he tried his hand at investing. He later on recognised that being a VC required something else. Here’s how he recounts his investing experience:
“…I joined some of my VC friends in investing in early-stage companies, and I served on a few boards. I admit that I’m not the best board member: I get impatient and struggle with the hands-off relationship boards are supposed to have with management. As I had learned at Greylock, I have the temperament of an operator, not an investor/advisor.”
This idea also surfaced in a conversation I had with VC recruiter Hazel Mulhare. For over a decade she has helped startups recruit top executive talent and she also helps venture funds identity talent across ex-operator and career VC groups. Mulhare’s observation is that there’s a mindset shift required for effective investors. Once they back a founder with an idea, they shouldn’t rock up trying to “fix things”. They should respect that the startup will work through its problems and proactively empower the company in a different capacity, one that involves asking the question: “How can I best support from the sidelines?”
This approach is a key part of operational empathy. It involves trusting and empowering operators to be operators, while seeking out the opportunity to support them in a capacity that considers the complexity and challenges of building a company.
Naturally, it’s easier for ex-operators to have operational empathy. It’s perhaps why tech ecosystems will always benefit from having some investors who have operating experience. Working in a company gives you more context than any investor could ever have looking from the outside-in. Teia Negoita, who worked as Series A investor before joining Meta as a Product Marketing Manager, put it to me this way:
“An investor thinks they are involved because they receive company updates but actually, they’re quite a few steps removed. They only see outputs. They’re not seeing how everything works…Everyone in a startup is an expert in their respective fields while investors tend to be generalists.”
This puts a cap on how effective an investor can be in providing direct operational support. A startup would rather hire an expert operator in product, sales, marketing, or some other function than rely on a time-starved VC to help them figure out an operational problem.
That said, there are some areas where a VC can be supportive by getting more involved in a company. “Even with so much written on the topic,” ex-VC Meri Beckwith and now the founder of Lindus Health told me, “there are still unwritten rules that a VC background helps you navigate.”
These rules mostly relate to raising capital, an area where VCs have more expert knowledge than a startup. In such instances a VC can get more hands-on to help close an investment round but again, operational empathy requires the acknowledgement that it’s the startup that closes an investment round, not the investor.
Ultimately, operational empathy is about putting yourself in the operator’s shoes. If you were a founder or startup executive, you wouldn’t want a generalist investor mindlessly espousing the latest startup advice they had consumed from a twitter thread. Nor would you want them to dominate function-specific decisions in a startup when they only see a fraction of what goes on in your business. Yet, you would welcome an investor’s support in areas where they have seen more than you have, or areas where they have access to knowledge and networks that you lack.
Investors with operational empathy respect the boundaries of operating versus investing, and tactfully contribute to a startup from the sidelines without interfering excessively. Rather than opine without due regard for what it really takes to build a company, investors with operational empathy know when and how to add value where it counts. That’s what operational empathy is about, and all investors — whether they worked in a startup or not — can cultivate it.
