Q: Can I Trust My VCs for Business Advice?
Are VCs a good source of business advice? It depends. Here's how to tell when your VC is giving you solid advice and when you should nod and think twice before taking action.
Back in the day, think 1970s, VCs came with experience running a business. Before launching the iconic Kleiner-Perkins, Tom Perkins ran HP’s computer division and launched their minicomputer division. Tom knew not only how to drive innovation but also how to manage a business.
Nowadays, anyone with some access to capital can become a VC. Look no further than the Chainsmokers, Will Smith, and of course your distant uncle who “knows about computers”.
In many ways, this is good news: money aside, anyone can participate in venture capital. This, however, creates a unique problem for many founders. Can they really trust their investors for sound business advice?
The case for Yes ✅:
Despite outliers like the Chainsmokers and Will Smith, good VCs have experience managing and growing businesses. Many, like Mark Andreesen, ran and exited their own companies.
Good VCs are steeped into their investment verticals and have a rich understanding of their respective markets, trends, and competition. They can be a great source of connections and referrals.
Hanging around successful operators gives VCs some unique (even if high level) exposure to good management practices. Even if they haven’t done the management themselves, they can share plenty of anecdotal evidence that could be useful.
The case for No ❌:
Many founders-turned-VCs don’t have much experience managing a business. Running a startups is a game of throwing shit on the wall to see what sticks. Put more politely, it’s a discovery process that stops as soon as a management practice seems to work for the particular situation. Founders often don’t have the time to deliberately develop leadership and strategy skills. These come through trial, error and reflection, which take time.
Even if they have extensive experience running a business, VCs, like most knowledge workers, have general experience with some depth in one area or another. The Chainsmokers might have some valid advice about driving virality in the music industry, but probably not much value to add when it comes to managing a dev team.
Despite all the talk about transferable skills, experience tends to be domain-specific. Adam Grant (Hidden Gem) and Nassim Taleb (Antifragile), among others, write that we, humans, are bad at transferring knowledge and experience in one domain over another. This is why your physician may tell you to lay off the fries, while she gorges on them. To take this further, what we think is a transferable knowledge isn’t so transferable. It’s one reason why Elon Musk failed at Twitter. He took the hammer that worked well at nailing scientific problems and tried and used it at a social media platform. We’ve seen the results.
On average VCs hold a position in a company for about 5-7 years. Their bet is that in this period the company’s valuation will rise enough to deliver a profitable exit. As a founder, you look differently at your business. While the valuation matters, you probably don’t think of your venture as a five-to-seven-year adventure. While a high valuation is nice, you also care about profitability, sustainability, building a great place to work at, etc. So, a VC can quite logically recommend that you hire the toxic genius to run your tech division even if he ends up ruining the team’s culture.
What do you do then?
Be judicious when it comes to VC advice. Know your investors, their strengths and weaknesses. Take advice from them only if it’s in their area of experience and expertise. If no one on your VC roster can help you solve a unique problem, hire a consultant. The fees may be high, but if you get the right one the value you’ll get will be 10x higher.