Understanding Venture Capitalists

March 2019 Update:  Back in 2006 I captured some advice for startup entrepreneurs by Guy Kawasaki. It was from an event where he spoke about startups and getting venture capital investment.  At the time I thought it had concise insights and aided in understanding venture capitalists.

For most of us in small businesses, venture capital is not a good choice for raising money. For one thing, most of our businesses would be of little interest to professional investors. And second, the comments in this piece subtly reveal why it’s not a good fit.

For instance, at one point in the discussion Guy Kawasaki talks about the founder handing over the reigns of the business to someone else. That very idea will be uncomfortable to many small business owners I know.  Serial entrepreneurs may be happy to exit gracefully, but could you let go of control?

If the idea of giving up control of your business makes you hyperventilate, then equity investment would not be a good fit. Because remember, once you bring in investors it’s no longer your business alone.  The business now belongs to you and the investors, together.

That’s why it’s important to understand the venture capital mindset. The world of high growth companies with equity investment, and the world of small businesses built on sweat equity, are two different worlds.

Below is the original piece which I’ve dusted off and updated a bit.

Understanding Venture Capitalists

Get ready for some name dropping. How about startup expert Guy Kawasaki and venture capitalist David Morgenthaler? The rock star of the startup world, and the senior statesman of venture capital, respectively.

This little name-dropping saga started when Guy Kawasaki came to Cleveland, Ohio. He spoke at an event that I could not attend.  But I did manage to listen to the podcast of the local radio program that Guy appeared on while in town.

Guy Kawasaki was part of a panel discussion.  At one point he asked questions of the several other guests.  Here is someone who has written business best sellers and essays on his blog, routinely laying down wisdom. Then consider what Guy Kawasaki does for a living — he is an expert in startups, developing a rock star following among entrepreneurs. Yet, what you realize is that Guy has huge curiosity. He seems unafraid to show that he does not know something. It is a wonderfully genuine and unexpected side of his personality.

There was even some fascinating interplay with investors.

For instance, David Morgenthaler came on the show at one point. David Morgenthaler (now deceased) was the Founding Partner of the well-known venture capital firm — Morgenthaler Ventures — that bears his name. Even if you don’t follow venture capital circles, the first clue of the man’s importance comes when Guy Kawasaki asks in semi-awe after  Morgenthaler is announced, “THE David Morgenthaler?”.

It just goes to show: even in the world of high growth startups and venture capital there are rock stars and then there are the “old money” stars. And even rock stars can be impressed.

The audio podcast recording of the show is long gone, but here is a transcription of some key highlights and Guy Kawasaki quotes:

Question: What’s the secret behind Silicon Valley’s success?

Guy Kawasaki: It’s many factors, but the single biggest factor was the presence of Stanford University and its engineering department. Investing in local universities is probably the single biggest thing a region can do to increase entrepreneurship. But that’s a long term strategy, not something that happens quickly.

Question: What about risk taking?

Guy Kawasaki: In one sense being an entrepreneur is about taking risks. However, the myth of the swashbuckling entrepreneur taking high risks is absolutely false. Yes, you take risks, but you are also trying to lower risk because you are constantly taking steps to mitigate risks.

Question: Do venture capitalists take risks?

Guy Kawasaki: Venture capitalists sometimes put their own money into an investment. But generally they are investing other people’s money, such as from insurance companies and pension funds.

Question: What does it take to create an entrepreneurial climate?

Guy Kawasaki: (1) A willingness to fail, and (2) people who will forgive people who fail.

Question: When should a founding entrepreneur hand over the reigns to someone else?

Guy Kawasaki: When it stops being fun. Most entrepreneurs stay too long.

Question: What is the gating factor limiting venture capital investment: availability of venture capital or the availability of good ideas?

David Morgenthaler: The gating item is the lack of innovative ideas. Venture capital follows opportunity. Venture capital does not create innovation. When Ohio was the greatest opportunity in the country about a hundred years ago, there was no institutional venture capital — it sprang up in 1945. Then when the opportunity arose in Silicon Valley, venture capital followed there.

I hope the above helped just a little in understanding venture capitalists and their mindset.

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