Venture Capital 101
The roles of venture capitalists are, of course, multifaceted. In brief, venture capital is a type of private equity focused on financing the growth of high potential new ventures of a variety of industries at various stages of their growth. To accomplish this VCs create a venture capital fund, for which they convince institutional investors, limited partners (LPs), to commit significant capital for the purpose of taking ownership stakes in high potential private companies. Acting as agents for their limited partner investors,[3] VCs set the parameters of the fund (e.g. stage and industry focus of the fund’s portfolio companies), and then identify high potential private firms to invest in after conducting extensive due diligence. Their job is not over at this point as they guide, support, and cajole the firms they invest in to pursue optimal strategies to potentially lead or create industries rather than simply developing new companies. In order to return their LP’s capital and an adequate return on that capital, VCs must guide a sufficient number of their fund’s portfolio firms to significant growth and a successful liquidity event (exit) through an acquisition or an IPO. Please see Figure 1 for a graphical representation of the VC business model.
Figure 1:
Venture Capital Business Model
So what can managers who are not directly part of this venture capital centric entrepreneurial ecosystem learn from these purveyors of capital and guidance? To provide current advice from practicing venture capitalists, I conducted a short survey of some of the Silicon Valley VCs who regularly provide insight for a related ongoing quarterly research study of venture capitalists’ confidence.[4] In the survey for this study, I asked each VC to offer one or two pieces of advice to business managers that they have found to be effective in guiding their portfolio firms. I also asked if I could cite them. Each agreed. The VC responses were placed in context of relevant underlying theory in entrepreneurship and innovation to validate the commentary as durable wisdom for business professionals. In the following please find a review of their responses along with my analysis.
Venture Capitalists’ Advice for Managers
Highlight Leadership Rather Than Management to Spur Innovation
Bill Reichert of Garage Technology Ventures offered “two recommendations for business leaders who want to drive innovation and growth in their companies.” First, Mr. Reichert insisted to:
…ban the title ‘manager’ and the word ‘management’ from your vocabulary. You don’t want ‘managers’ in your organization. You want leaders, up and down the organization. Managers seek stability, which is best attained by avoiding anything that rocks the boat. Managers suppress conflict, ‘Shut up and do what I tell you to do.’ Leaders seek out opportunities to innovate and make things better. Leaders invite diverse and differing perspectives, knowing that better solutions come from the clash of competing ideas. Disagreement and conflict are not bad, if channeled toward achieving shared goals. ‘Managing innovation’ is an oxymoron.
Underpinning Mr. Reichert’s argument, Ireland et al.[5] concludes that entrepreneurial leaders can foster an entrepreneurial mindset in their organizations by protecting innovations that threaten the current business model, making sense of new opportunities, and questioning the dominant logic of the organization.[6] And Blatt asserts the importance of cognitive conflict (the debate of ideas) in enhancing performance among cohesive teams.[7]
Supporting the aforementioned primacy of leadership, Dag Syrrist of Vision Capital observed “…governance and near-termism are restricting large companies more than small companies, especially public ones.” Mr. Syrrist continued, saying:
…generally, senior executives in larger companies have less time and freedom to try and do new things versus the same position in smaller firms…In my experience senior executives in large companies have a laundry list of innovative and valuable things they think would and could make a huge difference in all sorts of ways that would directly impact even near-term key performance indicators (KPIs), but they do not have time or free budget to do anything outside their overburdened near-term to do list… So my number one advice to managers at mid to large size firms, is get bosses that will let them spend x% of time and budget on new things. I worked with a $40B company that had two SVP’s called ‘pathfinders’—they clearly got this idea, and freed them from day-to-day crap. It’s hard to do because Wall Street and EPS drive all aspects of all large public companies in the end, and there are very few Steve Jobs or Mark Zuckerbergs out there.
Focus on a Meaningful Outcome and Chart the Milestones to Achieve It
Tim Draper of DFJ, shared, “My advice to managers is to make sure everyone is pulling in one direction; all motivations should center around a single goal. That goal should be clear and exciting. Financial incentives should align with the outcome you aspire to.” Jeb Miller of Icon Ventures stressed, “Have a strong conviction in your long-term vision. Startups can make adjustments along the way, but you need to have conviction in your long-term vision in order to convince others (employees, investors, customers) to join you for the ride.”
Bob Bozeman of Eastlake Ventures also emphasized focus on something that is “worthwhile.” Mr. Bozeman elaborated on this notion, saying:
You can only stay focused on one thing—make it something worthwhile. Often people pick goals that are opportunistic to get a fast win. Worthwhile things are not always easy but they are worth the focus and breaking down into an executable plan that can make life worthwhile too. When the long-term goal has a high worthwhile factor then the short-term steps (sometimes called work) are bearable.
Mr. Bozeman explained further “Connect short-term to long-term and vice versa. To some people the BIG picture is everything and to others tactical is everything. People that keep long-term goals in mind while getting things done effectively create the momentum that leads to success.”
Ensure a Company-wide Culture of Customer and Sales Orientation
The second point that Mr. Reichert underscored is:
Everyone sells. Nurture a culture in which selling is appreciated as one of the highest arts of entrepreneurship, right alongside innovation. Too many cultures disparage selling as an unfortunate necessary evil, and sales people are too often held in low esteem. Everyone in the company should have an orientation toward creating value for customers. Everyone should understand how to sell and love to sell the company’s product or service.
To amplify this effect, Bob Bozeman of Eastlake Ventures suggested “TEAMING.” He specified “Don’t be a loner—connect to the team that coordinates to get hard things done more effectively. This is the people factor in business and connects individual contributors to achieving the required momentum and being part of the overall success.” Underlying this point, Blatt maintains that developing a communal schema and clear contracting practices can help reduce affective conflict and support team cohesion and performance.[8]
Consider Startups’ Priorities, Opportunities, and Pitfalls
Kurt Keilhacker of Elementum Ventures indicated “One of my own phrases I cite to my first-time CEOs is ‘The CEO ultimately owns three responsibilities: The recruitment of the right people at the right stage, the securing of the right capital at the right price, and the advancing of the right strategy at the right market.’” Dag Syrrist of Vision Capital added that:
…Smaller companies can compete with larger ones simply by virtue of being able to do things; they are not limited to only those things that can move big needles in a big way. So, one way to think of this is that in startups the hard part is to decide what NOT to do. Because the future is unknown and there is no predictable revenue or near term growth the challenge most small companies have is doing too many things, thinking it’s a hedge against being wrong when in fact what it does is dilute each effort often into nothing. So we invented the idea ‘to pivot’ which is just another way of saying we were wrong. As the business grows this changes as the business is better understood, and it’s more about execution and cranking the production. This makes it obvious what to do, less time and money to do ‘new’ things, and as the company gets really big there is nothing left in terms of free time, budget or imagination.
Cash Efficiency
Shomit Ghose of Onset Ventures stated:
The two most important words for startup managers? Cash efficiency. Cash efficiency must always be a primary consideration for entrepreneurs in the startup fray. Companies without a relentless focus on cash efficiency are doomed to fall among the 90% of startups who fail. So once funds are raised, spend every dollar as if it’s your last. Focus your spending in two key areas: customer validation and building your management team. If you can use your funding to demonstrate market need as shown by paying customers and revenue growth, then you can look forward to continued up-rounds, over-subscribed financings, eventually leading to a tidy exit via M&A or an IPO.
Jeb Miller added “Spend cash prudently. The best returns for all parties are usually generated by capital efficient business models that spend wisely.”
Conclusion
While all the advice from venture capitalists may not be applicable to every organization’s day-to-day operations, their insights may provide unique perspectives that could give business leaders, from startups to public corporations, an edge in strategically guiding their firms through an increasingly dynamic and competitive landscape. The key themes emphasized by the responding venture capitalists include a focus on leadership, culture, and finance. Table 1 highlights dimensions of each of those themes.
Table 1:
Silicon Valley Venture Capitalists’ Advice for Managers
Ironically, the primary advice from venture capitalists to managers is to lead rather than to manage and to recruit leaders throughout the organization. Leadership begins with setting a clear and exciting vision and maintaining focus on that vision and using it to inspire colleagues and recruit the right team of leaders. Once that team is in place, encourage debate to get to the best solution and spur innovation. Ensure company-wide focus on a meaningful goal and connect short-term milestones to achieving this long-term goal while budgeting time and capital for continued opportunity scanning and experimentation. Meanwhile, build a culture that affirms a strong customer orientation and honors selling and cash efficiency.
Venture capitalists are revered for their ability to guide new CEOs in developing fast-growth businesses that disrupt industry incumbents and take or create market share in the process. In this Darwinian environment,[9] VCs rely on the leadership of the CEOs they support to communicate an inspiring vision and build a team and organizational capabilities every day to achieve it. Managers of established organizations may benefit from considering the priorities that Silicon Valley venture capitalists demand to achieve uncommon results, particularly as the rate of technological change and global competition increasingly impacts firms of all sizes and industries.
[1] Baer, M. (2010). The strength-of-weak-ties perspective on creativity: A comprehensive examination and extension. Journal of Applied Psychology, 95: 592-601.
[2] Christensen, Clayton M.; Johnson, Mark W.; Rigby, Darrell K. (1992). Foundations for Growth: How to identify and build disruptive new businesses. MIT Sloan Management Review, Spring 2002, Vol. 43 Issue 3: 22-31.
[3] Denis, D. J. (2004). Entrepreneurial Finance: An Overview of the Issues and Evidence. Journal of Corporate Finance, 10: 301 – 326.
[4] Cannice, Mark V (2004 – 2017, quarterly). Silicon Valley Venture Capitalist Confidence Index Research Reports. ProQuest and EBSCO, Volumes 1 – 13, quarterly: 1-5.
[5] Ireland, R.D., Hitt, M.A., and D. Sirmon (2003). A Model of Strategic Entrepreneurship: The Construct and its Dimensions. Journal of Management, Vol 29 (6): 963–989.
[6] Ibid.
[7] Blatt, R. (2009). Tough Love: How Communal Schemas and Contracting Practices Build Relational Capital in Entrepreneurial Teams. Academy of Management Review, Vol. 34 (3): 533 – 551.
[8] Blatt, R. (2009). Tough Love: How Communal Schemas and Contracting Practices Build Relational Capital in Entrepreneurial Teams. Academy of Management Review, Vol. 34 (3): 533 – 551.
[9] Cannice, M. and Bell, A. (2010). Metaphors used by Venture Capitalists: Darwinism, Architecture and Myth. Venture Capital: An International Journal of Entrepreneurial Finance, Vol. 12: 1 – 20.
