After 10 years of corporate life and 10 years of entrepreneurial life, I’m now in the process of transitioning into a new role: impact investor. As I’m now sitting on this side of the table, it’s becoming increasingly clear that being the VC has its perks. You get to roll with world-changers, visionaries, and CEOs. You write checks. You get a front-row seat at the best show on earth. (And you get to help out back-stage.)
But watch out. Talking to wise VCs who have gone before me, I’ve come to realize there are also grave dangers. Let me dig into three VC blind spots: the power trip, the power law, and the power plumber.
The Power Trip
A friend recently joked that after becoming a VC, his jokes immediately became funnier, he became better looking, and his remarks “so wise and witty!”
When you’re the person with the checkbook, people are constantly vying for your attention. You’re a bit of a celebrity because of your decision-making / king-making power.
As the saying goes, money is power. Furthermore, I would argue that money is the most dangerous form of power because you can store it, measure it, and exchange it. Over time, how does that constant power trip go to my head?
Sure, my #1 investing motivation is impact. I’m in this to help the most impactful ventures create new jobs, new skills, and new culture. Nonetheless, I could see how easily it would be for me to “drift.” Slowly but surely, the power trip keeps pulling. Seek and enjoy the attention a little too much. Wield the power to try to control people, instead of empowering people.
I disagree with the popular notion that “money just makes you more of who you already are.” Yes and no. Money does magnify who you are, but you still choose which part of you.
I’ve seen people change as pressures rise. At the end of the day, will having access to this power corrupt? Will this financial asset become a spiritual liability? We all know people who are so successful and powerful publicly, but lonely and empty privately. Not something to take lightly.
The Power Law
Everyone believes they’re better than average. VCs are no exception. And it’s even more pronounced.
Turns out there really isn’t such thing as an average VC. There’s basically the top 1-2% of VC firms that rock it, and then there is everyone else who are doing okay or getting rocked.
VCs do not follow the typical distribution curve (in blue), which would say that many firms perform at an average level of success with a fewer and fewer outliers performing really well and really poorly. Nope, VCs are way different. They follow the power law curve (in green) – a few firms perform extraordinarily well, and the majority of firms perform poorly.
Here’s another way to put it. The top 20 VC firms (out of 1,000 firms) created ~95% of the TOTAL return for the entire VC industry.
That’s right – VC’s not follow the 80/20 rule, they follow the 95/2 rule!
VCs will tell great stories of why our unique experiences / networks / timing gives us a chance to beat the odds. Remember – it’s about the same odds a college football player gets drafted by the NFL: ~2%.
And to top it all off, check out this stat: In 2017, the median ten-year returns in VC were 160 basis points below those of Nasdaq.
Beyond doing deals, spotting the diamond in the rough, and networking with biggies, being an awesome VC is actually a lot about being very efficient about the plumbing of money moving. It’s about building really efficient money-moving pipes from LPs to the fund, from the fund to startups, from startups back to the fund, and the fund back to LPs. VCs are like power plumbers – those amazing devices that get rid of clogs. VCs prevent clogs from even forming. And you know what makes good, non-leaking pipes? Solid due diligence. Accounting best practices. Tax, oh my gosh, tax. And legal – knowing what can slide and what is non-negotiable.
It’s these things away from the limelight that make all the difference. Just like basketball – all everyone remembers is hitting that game-winning shot. No one sees the years and years of taking 1,000 free throws a day, extra stretching sessions, 5am speed workouts, skipping that ice cream again and again… you get the picture.
An experienced fund manager told me recently, “Everyone likes the “idea” of being a VC, but very few commit to learning and refining the craft.” Get the plumbings tools out, we’re going to need them.
Oh, and by the way, 99% of everything I just wrote applies to entrepreneurs as well.
(Wait, what? You want to hear how I deal with these three blind spots? I’ll tell you… over coffee.)