The Best VCs: Operators or Investors?

Bill Burnham asks a question I was discussing earlier this week with one of the most successful VCs in North America: Are the best VCs operators (i.e., ex-CEOs) or are the best VCs investors?

It is not an idle question. Many people argue that the best VCs are operators. In other words, you need to work with VCs who have started and run successful companies, who have taken those companies from inception to relatively large size. After all, they know the pitfalls, they can give you a hand on difficult growth and staffing issues, and they can understand your position as CEO.

For a little while in the late 1990s people forgot this idea. It was much more profitable to invest in firms run by investors, by people who didn’t know diddly about running companies, but knew a great deal about momentum strategies and how to get in — and out — of markets when the “getting” was good. We ended up with venture firms staffed by jejeune investment bankers, and recently-minted MBAs.

Now, however, the pendulum is seemingly swinging the other way. Experience in back in vogue, and operationally-oriented VCs are arguing, as they should, that their approach to venture capital is again the right one.

In some sense, of course, this is a false dichotomy. You really want VCs who are great investors, but who also understand the nuts and bolts of running companies. They can help you with operational issues, but they also understand the arithmetic of markets and exits.

The venture guy I spoke to this week takes the pro-operator view. Matter of fact, his firm only hires ex-CEOs as partners: “Venture capital should be a second career”, he argued to me. No decommissioned dot-com sorts for them, just people who have run sizable outfits.

So, who is right? Burnham makes an argument, with which I largely agree, that if you look at the main skillsets of a VC — investing, judging people, sizing up markets, generating deal flow, and avoiding/spotting  trouble — those are areas where operational VCs have no more edge than investment-oriented sorts do.

Bill waffles somewhat in his conclusion, however, saying that it is really about on-the-job training. I’m going to disagree slightly. I think that the best VCs have both investing and operational experience. A pure operational team would have hung onto companies rather than selling them in the 1999-2000 period; a pure investment team might still be trying to create “burger companies” (built to flip) in 2003. Teams full of only one, or the  other, are the ones from which to run.


  1. It’s hard to find someone who appreciates business creativity and disciplined choice-making.