Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas’ general partners. If you like it, check out Fred’s blog and tweets @fdestin. And if you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. – Nivi

Many VC’s, particularly in Europe, are disappointing in their (lack of) intensity. They are not 24/7, passionate advocates of the businesses they fund; neither do you meet them at random conferences scouting for new companies; nor do they necessarily come across as particularly engaged at board meetings. Why is that? Let’s talk VC compensation and motivation for a second.

My motivation as a VC

Introspection is as good a place as any to start. Here are my top motivations for being a VC (leaving out the personal stuff):

  1. Company building: Every VC is different, some like doing the deals but don’t really care for the long-term relationship that ensues. With me it’s the “deal management” (as we call it) that provides me with the greatest satisfaction. An engaged relationship with the management team and co-directors towards building a great business. That’s when I feel I am part of a greater whole, of creating jobs, of the whole great forward human movement of innovation and entrepreneurship.
  2. Intellectual stimulation: I am a fairly consistent guy, but I do get bored. As a VC you get to see 100′s of new projects every year and meet a ton of creative people, and understanding each one challenges your (dwindling number of) neurons in a different way. Every company you invest in is different, and requires fresh thinking. So being a VC keeps me entertained, frankly. This is the primary reason why I never started a company. The trade-off is that you work through others (the management teams you fund) and hence never quite get that satisfaction of achievement in the same way.
  3. Personal recognition: Let’s face it, I love being recognised for what I do. Thankfully my wife keeps that ever-burgeoning ego firmly in check.
  4. The Hunt and the Deal: I don’t think you can be an effective VC if you do not like to be a Hunter, to be always out on the move looking for the next big thing, to want to win the confidence and trust of entrepreneurs and co-investors to take your money and no-one else’s. Inking that term-sheet and closing that deal gives me a great buzz every time. After all, I grew up on a trading floor !
  5. Money: More on this below.
  6. Lifestyle: I work hard, but on my own terms, when and where I choose. The less glamorous reality is that I spend 2/3 of my time on the road and that they greet me by name at hotels in at least 3 different cities, but I remain a master of my own destiny.

That’s my list.

Let’s zoom in on money

Here is the issue with venture capital as a way of making money:

  • It’s easy to get a comfortable lifestyle (say $300,000+ a year, often multiples thereof).
  • It’s (really) hard to make it really big (say $20,000,000+).

The not-so-secret fact about venture capital is that it has not made serious money for 10 years now. That means many, if not most, venture capitalists have not seen a large carry check in a decade. For those who don’t know venture economics, the partners in a fund contribute the first 1-3% of a fund with their own cash, which means most of us write checks worth > $100,000 every year to our own funds, sometimes a lot more. So if you are a VC in a median return fund, you keep writing these checks vaguely hoping you will make your money back; some will tend to get more and more focused on the nice salary they can take out every year.

To generate real carry, you need to work hard with no obvious improvement in the probability that your fund will be a wild success. In other words, the marginal return on effort expanded is not obvious and may well be zero. You won’t know until much later… And that, my friends, is the core problem with VC motivation.

Because it takes a very long time to know whether you are a good VC, partners can keep taking comfortable salaries for a decade or more before any form of verdict is placed on their money-making abilities. In the meantime, they manage their own calendar and work at their chosen intensity, with no immediately obvious return on effort expanded. Q.E.D.

The Solution

The solution is not simple. As an LP you would only want to invest in partnerships that provide:

  • Accountability
  • Meritocracy
  • Paranoia
  • Professionalism
  • Absolute hunger
  • True Passion for the business

…and of course, deal picking skills, deal building skills, and returns!

Paul Kedrosky at Xconomy has considered this problem from the LP angle with the following recommendation: pre-agree on budgets and/or find out what your chosen partnership uses its money on. Good advice, with plenty of practical problems, but clearly sound.

In a good partnership, paranoia and professionalism mean that emulation keeps everyone on their toes. And your passion for the business keeps you working all the time. And you really want to make a ton of money. And you want to be remembered for all the great business you contributed to. All of the above!

Hence:

VC is only a lifestyle business if you do not fundamentally care about being wildly successful. Now how do you screen for that, when every manager that comes into your office sings the same song?

Thanks for reading. If you like this post, check out Fred’s blog and his tweets @fdestin.

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7 comments · Show

  • morefromalan

    Interesting read.

    Maybe it’s that entrepreneurs (me) and VCs (you) are not that different.

    The really successful entrepreneurs have some kind of drive and make-up that’s not attached to the money. Not that we eschew the money – far from it.

    But at the end of the day you’re in it for something else. Or just because you can’t help it.

  • Laurent Rozenfeld

    Very interesting topic and great blog post.

    I founded a start-up last year and have been meeting several VCs in the last two months, most of them in Belgium (where I’m located).

    I think that there are huge cultural differences from one country to the other, VCs tend to follow the same frame of mind as local businessmen do. Belgian people are generally risk averse and so are the VCs; they only rarely invest in early stage companies. They also have “limited” budgets and so have to chose carefully which projects to invest in.

    On the other hand, I had a few exchanges with VCs from the UK and the USA and it seems that proximity becomes an important criterion.

    Though many VCs say they invest worldwide, when dealing with younger companies, they tend to keep them as close as possible.

    I suppose many of them had bad experiences in the past, as only very few start-ups actually deliver.

    Any idea where I could get a list of EU investors looking for high potential but early projects?

    • Fred Destin

      We definitely need a proper, open database of who does what kind of deals and at what stage of development.

      In Europe you will find a number of natural very early stage players including Eden Ventures, Mangrove, Atomico. Many of the mainstream funds do seed too: Atlas (e.g. Zoopla, Seatwave), Index, Balderton. Finally the angel and angel networks such as TAG / The Kleins, Cambridge Angels, Seedcamp etc.

      Varying degrees of quality across the board (I consider all of the above to be strong).

    • Fred Destin

      Here is a simple/useful idea: let’s build a really useful open DB of who invests in what types of deals and at what level, crowdsourced.

      Good early investors: Mangrove, Eden, BigBang, Atlas, Index, Balderton (sometimes), Atomico, Profounders, EFF.

      Angels: TAG / The Kleins, Seedcamp, Cambridge Angels, many individuals (Alex Hoye, Stefan Glaenzer, etc. etc.)

      … not a very long list.

      First money = toughest money.

  • Noel Wiggins

    I enjoyed this post, particularly because, I’ve never really herd from the perspective of a VC, and I think this was an insightful article.

    I am interested in the comments posted as well. I recently discussed the possibilities of developing such a web based database that would divide the database on the “types” of investments a VC gets involved with coupled with a way Entrepreneurs could create profile pages or pitches on their ideas.

    I was pumped on working on this project but the client I was speaking with about the project kinda dropped off the radar.

    If anyone would like to talk more about creating such a site please let me know it seemed like a really cool idea.

    A “facebook” of VCs and entrepreneurs

    Thanks and Regards

    Noel for Nopun.com
    a professional graphic design studio

  • Dave Brown

    thefunded.com is doing a pretty good job of capturing VC profiles. Take a look…