Jolly's Volley #8: It may be insane as a VC to be taking a crack at this topic and defining a great VC (best done by entrepreneurs)…but what the heck. This is India. Anything goes (and anything is possible). As a complete aside, I was recently at an event at the Harvard Business School, and one of the professors there asked me, “Mohanjit, do you know the difference between north and south India?”
To get to the punch line in a hurry, I of course said “no”. He replied, “In the South, people will tell you Ho Jaiga (it will be done); but in the North they will say Ho Gaya (it IS done)”. The point is “why not try and identify those traits that define a phenomenal VC”. I have been around for over a decade, as an entrepreneur, a corporate guy, investment banker and an investor. Let me also indicate that on the spectrum of awful to great, I am probably in the middle leaning towards awful and trying to tip the other way. Only time will tell, and partly investment decisions but primarily entrepreneurs will decide how good a VC I really was.
So, here goes (in no particular order)…
1. Operationally savvy: I personally believe it’s very difficult (although not impossible) to do a job of a VC extremely well without having been an entrepreneur or having been in an entrepreneurial organisation. The job of a VC should be (but often isn’t) more than that of a guide or consultant where one can get away with high level thought and direction. What’s necessary, especially in India, is also tactical help and approach of dealing with day to day issues that an entrepreneur faces.
BTW, in India my experience has been that the VCs have to be a lot more hands on than in the US, generally speaking. I have made sales calls, done the hiring/firing, and sat in meetings with potential strategic partners trying to convince them of the value/synergy of their partnership with the portfolio company.
2. Driven by passion than by greed: VCs often tell entrepreneurs, “focus on creating great companies. If you execute successfully, wealth creation will happen”. Sometimes, we actually forget to practice what we preach. VCs often get more excited about management fees (fees that VCs earn on an annual basis for the funds being managed by them on behalf of their investors, known as Limited Partners), than about the upside that they share with their LPs (usually on a 80/20 basis, meaning that the VC gets to keep 20% of the profit and passes on 80% to the Limited Partners).
Great VCs get just as excited (or even more so) than the entrepreneurs about the potential impact that a company can have and in so doing, the kind of shareholder returns that are possible. Great VCs truly believe that the portfolio companies can be “game changing”, and they themselves can have an impact in making that become reality.
3. Approachable: First and foremost, VCs exist due to the entrepreneurs. Again, they tend to forget sometimes that without entrepreneurs, the venture business wouldn’t exist. Many though think (incorrectly) that without VCs, entrepreneurship would be hampered in some significant way. Great VCs are approachable, by anyone and everyone, even those with crazy and completely un-implementable ideas (by the way, one of the craziest I ever saw was lunar real estate. Why not buy a plot to plan for when lunar colonies become a reality. The best name award goes to Butterchicken.com).
The goal for every VC should be (and only the really good ones succeed here) to provide some positive feedback, even when the answer is “no” to an entrepreneur.
4. Humble: I have often talked about this as this is a pet peeve of mine. My definition of a great VC is one who knows the difference between confidence and arrogance while choosing the former. They tend to let their track record and the feedback from entrepreneurs whom they have influenced do the talking for them. The good news is that for every “higher than thou” attitude-filled VC, there are multiple who are far more grounded. They may not have the limelight and their name may not roll off anyone’s tongue easily, but they have been consistent for decades with a rare combination of complete respect from entrepreneurs, peers and LPs alike.
5. Timely and firm decision making: This is one of the toughest talent to acquire in the VC business. It’s the art of deciding, for example, when to shut a company down, when to package and sell it and when to lay off a significant chunk of a given company (tough decision making is often more difficult on the downside than the upside). The single most important commodity that a VC has is his/her time.
Often VCs (and I am no exception) fall more in the category of emotional attachment to the portfolio, and continue to support companies that, quite honestly, should be shut down or sold off much sooner than they often are. It’s human nature (that’s how I convince myself). But after a couple of decades in the business and having seen dozens of such example, the pattern recognition ability kicks in and decisions, which may seem very difficult for most, are made with confidence (not that the decisions are easy) by the truly great ones.
6. Communication skills: No matter what field one is in, excellent communication skills are often a pre-requisite for getting ahead and earning the respect of peers and all those around oneself. The VC business is no exception. Whether it’s trying to convince a senior executive to join the portfolio company, or delivering good or bad news to the team, a truly great VC does it in a way that is not only convincing, but genuine. Being able to communicate is a combination of charisma, clear thought, deep knowledge of the audience, context and crisp delivery (whether written or oral).
7. Analysis (without the paralysis): The spectrum of VCs has the following two ends– those who can take months to make a $100k decision and those who will make a $10M decision in 30 mins. The really good ones have the recipe with just the right mix of analysis with the optimum level of “gut feel” to make the investment call. What really shines is what they tend to do after the investment.
Specifically, they have an uncanny knack to guide the investee company by focusing on no more than 2-3 key business metrics that really matter and have the company be obsessive about them, whether it be repeat customers, long term value vs. customer acquisition cost (LTV vs. CAC) or something else. They epitomise the KISS principle and have their portfolio follow it to perfection.
8. Strong leadership skills: Books have been written on this topic, so I won’t spend much time. A great VC can infect others with a level of evangelical passion to achieve a well defined goal, often against fairly significant odds. Often leadership is an amalgamation of several previous points including communication skills, decisiveness, analysis and vision.
9. Track Record: After all, VCs are in the business of making money for their LPs and by doing so well, for themselves. One can do all of the above, but if the results (IRR) are simply not there, nothing else matters. Whether it’s by consistently finding the doubles and triples (or 2’s and 3’s in cricket terminology) or it’s truly finding the companies that can “return an entire fund” (along with a bunch of other write-offs), great VCs are typically in business for decades.
The only reason they stay in business for decades is because the LPs feel extremely confident in their investing abilities.
10. The Four Fs: The VC business boils down to the four F’s –Finding (generating deal flow), Funding (selecting the right ones), Fixing (most companies need some guidance and often, major overhaul), and Fostering (continuing to add value, whether it’s by hiring, opening customer and partner doors or other strategic as well as tactical issues). The great ones truly excel in all of the above.
The readers will notice the obvious point that I didn’t name any in the above article. That’s because I would like the readers to do some work and identify those who you think are truly great VCs.
(Editor: We welcome suggestions from readers on who are great VCs in India. Do comment).