Venturing opinions | Experience, and money, can make or break an early-stage deal
In the recent issue of Dow Jones’ Private Equity Analyst, contributor ExpertCEO put together a list of 12 things a venture capitalist would never say. In addition to “Quite frankly, I’m not the smartest person in the room,” there was “I will not let my absence of direct experience reduce the intensity of my opinion.” As someone who has worked in venture capital for more than 14 years, that latter one hit home. So, I’m writing this month about what investors call “domain experience” and how it may inform opinions of investors and entrepreneurs.
A professional venture capital investor is paid primarily to return (a lot) more money than he or she raises and invests. To do this, an investor must find good opportunities, analyze them for their potential and risk, negotiate a fair deal with entrepreneurs and govern the company until a “value realization event” or exit occurs. Given the diversity of activities required to do this well, an investor benefits from a variety of different operating backgrounds — entrepreneur, corporate, financial and consulting backgrounds are common. Analysis often benefits from a strategic background such as that of a consultant, financial analyst or technologist; negotiation benefits from a legal or investment banking background; and the governance and operations demands of the business benefit from a corporate and/or entrepreneurial background. Few professional investors can boast of depth in all important “domains of experience,” but most have a couple of areas in which their skills and judgment should carry some weight.
Likewise, entrepreneurs in early-stage ventures come from all backgrounds. And like venture capitalists, few entrepreneurs bring direct experience that makes them a “domain expert” in all realms of their complex business venture. So, just as a venture investor needs to maintain a certain humility in relation to what he or she knows from experience, an entrepreneur must recognize the limits of their experience even while representing their confidence and competence to investors and partners.
Learning from experience
There are many times in the life of a company in which neither investor nor entrepreneur has true authority borne of experience. Often in these situations, the VC will use their financial authority as a basis for broader influence than their experience warrants, as the “intensity of my opinion” quote in the opener suggests.
VCs are a confident lot, often borne of a good education, broad exposure to a variety of companies and industries, and a fund bank balance that gives them considerable influence in matters well beyond those to which their domain speaks. A venture investor’s ability to fund a company’s business plan gets a lot of people around the boardroom to listen, even if they don’t believe the individual has the requisite domain authority to inform a given decision.
Better VCs know how to exert their influence, tempering their considerable legal authority to do so with the recognition that they may not always be the “smartest in the room.”
It’s assumed that this authority pits the investor against the entrepreneur — often, however, domain authority conflicts exist between co-investors.
For example, I once co-invested in a company alongside a senior, former corporate executive with 50 years of experience, mostly in corporate operations and mergers and acquisitions. I was a kid compared to this guy (and he wasn’t shy about letting me know it). His five decades of large public company experience dwarfed my 20 years of venture capital and operating experience. My judgment, initially, was to defer to his experience when it came to operational decisions.
This was a mistake, in retrospect. His sensibilities were those of a corporate executive, not an early-stage venture capitalist. His big-company approach was to spend and trust the money would be raised to support. More than trust, he insisted he’d help raise the capital to support his “go big” strategy, and for a year, he helped raise nearly $9 million of $15 million that ultimately went into the company over a period of three years.
As it turns out, I should have attempted to “override” his corporate consumer products experience with my venture experience base. The company ultimately failed as a result of both his approach and what turned out to be a shortfall in funding to support his ”go big” approach. Live and learn.
I’m nonetheless a great believer in letting experience rule. Judging how and when to exercise a given domain experience — and which type of experience should rule in a given situation — is not always easy. Venture capital is about taking risks and expecting to be right about a third of the time. The lesson, for both investors and entrepreneurs, is to judge well whose domain should rule.
Michael Gurau, managing general partner of Clear Venture Partners in Portland, can be reached at mg@clearvcs.com.
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