Ray Rothrock

What makes an effective VC?

In Energy, Technology, Venture Capital on October 24, 2013 at 7:50 pm

Chris diGeorgio and I were invited speakers at a client meeting of GW & Wade Company last week.  Chris was my co-panelist and had recently completed a substantial report published by Accenture on the impact of venture on jobs.  My role was to discuss venture as I just completed being the chair of the National Venture Capital Association. Gene Sinclair of GW&W was our host.

In the Q&A a gentleman asked me, “What makes a good VC?”  Given the data that we just presented, this was a great question.  On the stump I answered it in my usual flowing way.  However, as I was driving home, my answer haunted me as incomplete and not specific enough.  This question is so important that I’ve thought about it more and decided I would jot down my more specific thoughts.  Here is a minimum list of qualities that I think make for a good and effective VC?

1. Personable.  Venture is a people business.  One has to be confident but not arrogant so as to attract similarly smart and capable people.  Deal flow is the elixir of venture and making deal flow happen is easier if you are personable.

2. IQ.  You need a good IQ to go toe to toe with the smartest entrepreneurs.  They are all very smart.  Further they know more about their business than you, but in all likelihood, you know more about building businesses than they do.  So there is a balance here.

3. Pattern Recognition.  The power of transferring learnings, good and bad, from other startup experiences to the current startup is crucial.  Learning over time to see the signals — ones that tell you about the CEO and the culture, or ones that tell you about confidence of the team, and ones that tell you about attention to detail — matter greatly.  Seeing patterns is not something most people have.  I think this is necessary to be a successful VC.

4. Persuasive.  As a VC on the board of a startup, there is only one actual action you can do – hire and fire the CEO.  Nothing else.  Everything other action you impart comes through your personal salesmanship and persuasiveness.  This requires clear thinking, logical thinking, and willing to listen so that a dialogue occurs and all points make it to the table so that good decisions are made.

5. Passion.  Doing a startup company is hard for the entrepreneur as well as the VC. It takes passion to get through the tough times, and startup companies have tough times.  Forgiveness for honest mistakes and letting others take credit are strong, mature features of a competent and supportive VC.  At the end of the day, you are building a company.  A passion for building, growing and desire to win are essential passions you must have to be a good VC.

6. Closure.  A great VC knows how to close and get stuff done.  Time is short in a start up and getting stuff done quickly really matters.  So making hard choices and taking action is required.  If you can’t get something done, you can’t build a company.  And therefore, you probably shouldn’t be a VC.

I’m sure there are many other features of a successful VC.  Everyone does it a little differently and finds their own way in being successful.  These are just some things I’ve honed over my 25 years of investing in startups.  But, of course, nothing beats backing a really talented entrepreneur who never needs a hand.  That is a marvelous sight to behold, and every VC should just stand back and marvel when that happens — it is truly magic.

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