Mark Suster wrote a great piece about the decision between being a VC and an entrepreneur. It’s one that I personally had to make when I recently left the VC world to become co-founder & CEO of Kohort.
Suster outlined a compelling argument for why it’s safer to be a VC and then wrote: “that’s why when I met Mark Peter Davis and heard he was giving up his VC career to run a startup I was seriously impressed. It takes cojones – hats off to him.” Given my perspective at the time it did take “cojones.” In hindsight, however, my decision to jump from VC to entrepreneurship couldn’t have been more of a no-brainer.
While to outsiders the paths of those who skip from one side of the line to the other might seem intertwined, the decision to journey from investing to operating (and vice versa) is not trivial. I had to choose between 1) the cushy VC work hours, a stable paycheck, a piece of a diversified portfolio of future money-makers and doing something I really enjoyed; or 2) the perpetual adrenaline rush of being on the front lines of a higher-risk venture doing something I *loved.* Since I’ve joined the startup world, I have slept on the floor of our office numerous times and I haven’t yet gotten around to paying my own salary (will somebody please call Paychex?). And, I did all of this only to have my upside concentrated in a portfolio of one. One could easily argue that it wasn’t a “rational” choice.
So why did I do it? I ultimately made the decision to dive in headfirst because I fell head-over-heels for what my new startup is and what it can do for the world. It’s what I want to do with my life – the calculus went out the window.
What’s interesting, however, is that since I made the decision to join the ranks of the people who drive innovation forward through sleepless nights and the tireless pursuit of what should be, I have come to realise that my career switch wasn’t very risky at all. Sure being part of a startup is riskier than working a ‘real’ job, but in the context of startup / VC land it’s a relatively low risk career move for a young VC. I want to share that hindsight perspective here to inform others who may follow a similar path.
Before I dive into why it’s a less risky move than it might seem, I wanted to point out that a lot of VCs are secretly wrestling with this decision. Since I made the leap no less than a dozen young VCs (from both coasts) have reached out to me to better understand how I got to “yes” on going “all in” on just one hand.
While a lot of junior VCs love their gigs, it turns out that a number of them feel stuck. All of the up and coming investors who reached out admitted that deep down they would rather be entrepreneurs, but making the switch was “too risky for them” or they “don’t have the right idea.”
Let me address the second excuse first – because it’s bogus. If you live and breathe new ideas (as VCs do) and you don’t have the right idea yet you’re probably not an idea guy. So what? If you’re even a moderately well connected VC it’s pretty easy to join someone else who has a *good* idea. I’m calling your bluff; that’s not the real issue.
I think the first excuse gets to the heart of the issue for most folks. Is leaving a VC gig for startup land likely to screw up your career? I would argue no, and in fact it will strengthen it.
After making my own leap to the other side I have a new, more clear perspective on the two most prominent concerns:
Concern #1: I won’t make as much money now
First – salaries: it’s probably true – startup salaries aren’t as hot-to-trot as VC paychecks. But, as one young VC put it, venture capital is a great way to “get rich slow.” ou don’t reap giant salaries (and you’re underpaid relative to your peer group in finance) until you’re a legitimate partner at a firm. Once you’re a partner, life is pretty good.
I draw two conclusions on this topic: 1) It would have been a while before I was crushing it as a partner, so the foregone compensation wouldn’t have been life-changing money and wouldn’t have mattered. 2) The opportunity cost of foregone salary now is lower than it ever would be again (as my paychecks keep getting bigger).
Second – equity: while junior VCs don’t get hefty pieces of the carry pool at venture funds, those payouts can add up to something substantial. The question a friend told me to ask myself was “for how much would I need to sell my startup to make up for my foregone carry?”
After doing the maths what was surprising was that even a relatively small exit could make me far better off than having carry as a junior VC. It’s better to own a lot of something small than own a minuscule amount of something huge. VCs first have to return capital to their investors, then they typically get 20% of the remaining payload and only a small portion of that pie gets shaved off for a junior VC. When all is said and done the cash pile is whittled down so small before it enters a junior VC’s bank account that it can easily be offset by a small exit.
Concern #2: I won’t be able to get back into VC
I have heard it all on this one. Some advised me that if my startup flops getting back into VC might be challenging, others told me that in the worst case scenario failure would make me an even sexier candidate.
So who is right? Here’s how I think about it – if I were hiring another person onto my VC team – would I want a guy with a failure under his belt? The answer, resoundingly is, “hell yes!” Entrepreneurs want to work with people who have felt that heat of the kitchen – it makes them more valuable advisors, and more valuable investors. And if you dig into the backgrounds of VC teams everywhere you’ll find both successful and failed entrepreneurs. My suspicions were confirmed recently when I spoke to a VC recruiter who suggested that she would place me at a firm regardless of how my venture turns out. So even if your venture goes belly-up you’re likely to only be more marketable than you were before – taking the plunge makes you better off.
The Implicit Hedge
Taking this one step further – I would argue that failing as a CEO is a merit badge that can help hedge a VC career. The VC industry is in a constant rhythm of contraction and expansion. When the market contracts would-be partners at firms find themselves stuck in no-man’s-land. Their firm might not have the assets to promote them to partner and there aren’t many firms that would hire them in laterally.
So, what options do they have? Well, if they had some operating experience they could easily take a detour into a management role at a hot new startup or a more established company. Without that experience their background can be a tough sell on the operating side.
In sum: First, my message to the would-be VC-turned-entrepreneurs out there is *sack-up* and throw your hat in the ring. Second, while I do sincerely appreciate Mark Suster’s support, it turns out that I’m probably not taking more risk than entrepreneurs that left non-VC gigs. They have the real “cojones.”