“There is a lot of talk about “value add” from VCs but often that is just for show during the process of winning the deal. The number of VCs who actually add a lot of value to their investments is much smaller than you would think.” — Fred Wilson (GP, Union Square Ventures)
“I miss being entrenched with an entrepreneurial team — and all of the anxieties, aspirations, and perspiration of building a product.” — Scott Belsky (Former GP, Benchmark)
The best venture investors are rarely long time company builders. Mike Moritz was a journalist. Chris Sacca was a lawyer and deal guy at Google. Bill Gurley was an engineer and investment banker. Peter Fenton and Fred Wilson have pretty much always been investors. The list could go on and on.
Yes, many great investors were founders but often times they played specific technologist/inventor roles more than long term company builders. I put Marc Andreessen in this camp. And founders with quick, big exits often make great investors — that is effectively what they did as entrepreneurs!
I consider myself a builder. I spent a decade plus as one of many leaders in the trenches building Rackspace. I joined in 2000 when it was roughly 25 people and $2m in revenue and one of hundreds of hosting companies. I left three years ago when it was 5000+ people and about $1.5bn in revenue.
After startup success, I followed the well traveled path from long tech company career to angel investing. Short story: I sucked at it. I think I know why, and I bet my shortcomings are shared by most other builders.
First, like Scott Belsky, I found angel investing boring.
Investors hear pitches. And more pitches. They network for deals. They negotiate. They assess founders. They build market hypotheses. Yes, they get business updates and sit on boards and give advice but they do it at a very high level, identifying patterns and encouraging into or around them.
In my operating career, I loved the grind it out, down and dirty business problems new and growing companies face every day. Pricing. Positioning. Hiring. Firing. Org structure. Culture. Crisis management. Persuading customers and employees. Selling. Offer creation. Partnership building. Investors do not do this work. If you love it, you will hate investing.
But more importantly, I was bad at assessing investments.
As a venture investor I had one big blind spot: I saw opportunity in everything. Great idea, but bad team? It can be fixed. Dumb idea in a good market? Nothing a shift here and there can’t remedy. Big competitor on the horizon? We will specialize and own a valuable segment. Despite real and obvious problems in many of my investments, I could envision the moves to realize the opportunity. If I could see the path the team might take to get it right, I felt there was no issue. But, as an investor I was fooling myself. Building these companies had nothing to do with me and my view of the path of the business.
Startup investing is about finding and choosing winning packages — ideas and teams with a better than an average chance of pulling it off. You are looking for big waves and good surfers. Company building is about making a winner with whatever you have — being a surfer and paddling like hell to get in position for the next wave. They are different skills.
Anytime I hear a VC or angel say they really add value, it is usually past builders. And like Fred Wilson, I am skeptical. VCs can indeed help. They often add a valuable seal of approval, access to a big network and can increase exit paths (Mark Cuban nailed it here), but truly impacting the business model of a startup via advice, experience and operating help is extremely rare — if not impossible. There are too many pitches, too many deals to go deep on and too much conviction in founders to really alter the operating path of an investment. I think this is why the most great VCs actually were not builders. The best investors ignore this possibility of filling gaps and focus on the package as they see it — the idea, the market, the team — and make a call. They are not blinded by their own ability to improve the business.
So my startup investing days are over, but I am back to company building with a new venture called Scaleworks (well, we are a year old now). We own majority stakes (usually 100%) of SaaS companies — just a few. We sit right next to them. The CEOs are our true partners. We collaborate daily with the teams on the real work of building good businesses. It’s still an investor model of sorts, but 90% of my day is back to working the day to day problems of business that I love. It’s a ton of fun, and there is a lot of overlooked companies waiting to be built into something great. Time and results will show if this new venture equity model plays fully to my strengths. But, one thing’s for sure: I am out of angel/seed game and leaving it to the experts.