Before I became a VC, I imagined that it would be a cushy job**. I assumed that VCs hang out with super smart founders, give the ones they like gobs of Other People's Money, then sit back and wait for the profits to start rolling in. Pretty soon, they're driving around town in Tesla Model S's (Tesla Roadsters are so 2010), "sharing notes" with fellow investors over expensed meals at Michelin-starred restaurants, and spending summers in Fiji because they need quiet time to "think deeply about the future of technology."
In reality, it's nothing like that. Well, except for the Tesla thing — VCs seem to love Teslas.
Here are some of the biggest challenges of venture capital that I didn't anticipate when I was still a software engineer:
- Being responsible for other people's money is hard. VCs raise money from friends, family, pension funds, university endowments, and other organizations. Imagine how you'd feel under the pressure of knowing that if you don't do a good job, your friends or your family or your favorite university are going to lose millions or tens of millions of dollars and the blame will fall squarely on you. Are you imagining it? Well, that's how I feel all of the time.
- Telling great companies 'no' is hard. Most funds invest in fewer than 2% of the companies that they look at. The problem is that while a company in the 50th percentile looks very different from one in the 90th percentile, a company that's in the 97th percentile looks pretty similar to one in the 99th percentile. It's frustrating to spend a lot of time with a good company only to decide that the fit is not quite there. When you tell them 'no', you feel like you wasted the founders' time and you have nagging doubts about whether passing was the right move.
- Not having a good feedback loop is hard. Most jobs offer feedback from many sources. Whether you get bug reports from users or comment cards from customers or one-on-one performance reviews from managers, you quickly acquire a sense of how well you're doing and how you can improve. Investing is not like most jobs. A typical investment might take 5-10 years to exit (or fail), and in the meantime you don't really know of you're doing a good job. Furthermore, by the time you discover if your previous investments were shrewd, the landscape has likely changed and you need to modify your decision-making criteria. Now you're back where you started.
- Understanding your weaknesses and compensating for them is hard. I have my personal biases, just like everyone else. For example, as a former software engineer, I get overly by startups with great technology or very strong technical cofounders. It takes time to figure out your blind spots and even more time to learn how to adjust for them. Of course, while you're trying to improve your self-awareness, you're also meeting with hundreds of startups and potentially making very expensive mistakes. I feel very fortunate to work with three awesome partners, and being able to compare our unique perspectives is very helpful for calibrating my decision-making process. I think it would take me years of experience to feel comfortable running a fund by myself — and even then, I suspect working by myself would be suboptimal.
- Being contrarian is hard. You can be a good investor by following the herd, but you won't be a great investor unless you see things that others don't see and make bets that others are not willing to make. The question is, how do you know when you're seeing something that others are not, and when you're just being stupid? There's not that much data when you're investing in early-stage startups, and when it comes to being incredibly insightful vs. incredibly stupid, it's difficult to know which side you are on.
** To be clear, I didn't become a VC because I thought it would be cushy; I became a VC because it was a rare opportunity to meet great people, learn from them, and help them out in various ways.