I blogged yesterday about how a venture capital investor needs to persist to succeed. One reader, Michael Byrne, responded on my blog with a very thoughtful comment. For me, he truly captures a major conundrum for entrepreneurs and VCs: how much risk to take–and, which kinds?
With his permission, I’m posting his thoughts below. I think it’s brilliant stuff. So, here’s Michael:
My observation: most VCs are unremarkable in performance. Provably so. Many VCs have skills but their skill sets are the same as all the other VCs, so they are commodified, i.e., “pattern recognition.” So even if “20-year-old Stanford CS with some traction” is a strong indicator of possible success, if the VC market all recognize it, returns will get bid down.
So the next layer of conventional wisdom is to be “Contrarian-Correct” but if you are contrarian, that means your model is different from everyone else, which is hard to pull off since the majority of VCs are socially risk-averse and come from a homogeneous social background. So the VCs at the top of the pecking order can afford to take model risk (since that is a benefit of being at the top) and make contrarian bets. This is where the lucky at the top can be revealed to have been situationally lucky, by e.g., making big bets in clean tech.
So why do I say a VC who went big into clean tech is an indicator of having been situationally lucky and not skillful, because the clean tech “boom” was a political opportunity, driven by tax and grant policy, not a business that was driven by technology, markets or what real people wanted. Like Ginger was telling people what they wanted, too.
And that is the key to being a great VC. Not being a pattern-matching, portfolio-optimizing, political-edge seeking, morality-agnostic, passive, risk-averse financial engineer, but rather helping build businesses that create huge value for real people that you can look in the eye, and not think are just numbers, demographics, and traction metrics. Abstractions are lies.
And who builds those businesses? Mission-driven entrepreneurs. Steve Jobs, Elon Musk, Jeff Bezos, the Google Brothers, John Mackey, Sam Walton, and others. It’s win or die trying, because you are going to die anyway so why not do what is important. And winning isn’t making money, it is achieving the mission. Giving people what they want (“want” means “lack”). Giving the people what they lack. These are entrepreneurs who are playing a different game from everyone else.
VCs should be looking for a Saul and not for the promising young Roman shopkeeper. But they don’t because they lack faith, not in Saul, or in his mission. They lack faith in themselves and their own mission. I would argue that VCs aren’t just motivated by money but they have a dream too of making some kind of impact in the world. Collecting a Unicorn. But if they actually lived that faith, they would probably be entrepreneurs of a kind, and actually I think there is a way to do that:
I have yet to hear of a VC who says “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.”
The VC that does that will attract the mission-based entrepreneurs who are on the same path and earn mutual respect. Team building.
It takes courage to destroy your ego, to destroy your identity, in order to serve a higher purpose, and it takes even greater courage to “testify.” To say out loud what you believe in, and what your mission is.
If a VC could say that, he could live the best possible outcome of his life.
So, Persistence, yes, but also courage, and a higher purpose articulated.
What a thrilling ride that life is! People, even the 1%, bow down to Fear and sell out their own lives now for so cheap.
One thought on “Guest Post: Michael Byrne on Venture Capital”
That list of entrepreneurs contains a who’s-who of successful tech pioneers for a reason. It’s not just that a higher purpose is useful in itself, but everyone can smell the difference between a by-the-numbers startup and one that exists for a tangible reason besides money. The value you describe translates to a real dollar value too.
The statistics on VC success aren’t great, so it’s not like their pattern-matching abilities are somehow dramatically superior. Forex trading this is not. So why not invest in values? It’s at least as good a metric, and it will provide all kinds of returns.