Guy Kawasaki Hates Me

In a post entitled The Venture Capital Aptitude Test, quasi-famous blogger and sorta-VC Guy Kawasaki rags on junior venture investors in general and on young VC associates in particular. He prescribes “contempt” for “any young person who opt[s] for venture capital” and implies that such people are “full-of-shi[t]” (saying “shiitake” when you mean “shit” is just barely cute enough to countenance the first time, Guy, but let’s call a deuce a deuce).

In other words, Guy Kawasaki hates me.

Now, I am by no means the archetypal target of Guy’s scorn — his sharpest comments are reserved for MBA and I-banking types without operating experience, and he has a soft spot for those of us with engineering and sales backgrounds. I have, in fact, nothing but operating experience (two software startups, one profitable, one defunct) in my career to date, but being in my late twenties and working for Voyager Capital is inexcusable to Guy.

Guy sets up a straw-man argument, viz:

1. Working in VC is the best way for a young person to learn entrepreneurship.

2. Young seekers of VC positions are motivated by gigantic ($500k) salaries and massive carried interest portions.

3. Young VC associates are great candidates for shepherding along startups through their challenges.

Unsurprisingly, Guy knocks down that straw man, says “shiitake” a couple times, and then congratulates himself. Hurrah! He does so with the help of an interactive, Cosmo-style quiz that asks fairly shallow questions about who one is (“background”), what one has done (“first-hand experiences”), and what knowledge one has (“necessary knowledge”). Cognitive dissonance must set in for him around here, since his California-Bay-Area-influenced emphasis on “direct experience” was offset by an ancien regime-style weighting toward character and background (it’s Baba Ram Dass vs. the Greek chorus). Finally, Guy racks up the comments — mostly strokes for Guy with a bunch of self-reported high (or low!) scores and self-strokes — and takes the very odd approach of appending his replies, separated by a line of asterisks, to the three negative comments that dared to challenge his post.

Where should my criticism start?

A decent kickoff would be to work backwards through his straw-man points. Guy’s pointing out that VC associates aren’t necessarily the best mentors and board members for startups is not only obvious, but pointless. A VC associate isn’t supposed to be the wizened old sage who shepherds a company to success; indeed, I would suggest that in most VC firms, associates aren’t even allowed to take board seats.

Guy disingenuously ignores the idea of division of labor. A quick primer on investment team roles for those who aren’t familiar with finance (from which VC borrows a lot of titles):

  • General Partner / Managing Director: A “General” or “Admiral.” Not only a full investor, but an owner of the firm.
  • Venture Partner: A “Commodore” or “assistant undersecretary of defense.” Sometimes acts like a GP / MD, in other firms is more like a part time advisor.
  • Principal: A “Captain” or “Colonel.” Able to take board seats and have one’s “own” investments.
  • Associate: A “Lieutenant.” Might lead deals, but doesn’t “sign checks.” Not usually on boards.
  • Analyst: An “Ensign” (or maybe a sailor). Helps with deals and “bird-dogs” leads, but doesn’t do deals. Definitely not on boards.

Associates and analysts are generally MBA or pre-MBA types, and are expected to do much of the due diligence, financial modeling, and to follow up on the colder end of the lead spectrum (all the way down to cold calls, in some cases). In effect, they are doing exactly the work that their MBA, I-banking job, or consulting gig prepared them to do: spreadsheets, ginning up pitch books for LPs, reading of contracts and term sheets, talking to people and vetting their credibility, sanity-checking business models, etc.

It is at the GP / MD and Principal levels that advising of portfolio companies comes into play. (Now, will you in practice see overzealous associates running their mouths in situations they shouldn’t? Of course; in the mix of ambitious people you hire associates from, you’ll get some arrogant and / or impudent overachievers. But it’s the exception that Guy takes for a rule.)

And, if anybody is making the mythical $500k salaries, it’s folks in the GP / MD bracket. But don’t take my word for it; you can make a reasonable estimate of GP salaries for a given firm. Simply multiply the total assets under management of a VC firm by a reasonably high management fee (say, 2.5%) to find a credible upper bound for the firm’s non-carry revenues (ignoring for the moment “franchise” firms that essentially license their brands to others). Then, take a slice off the top (say 25% minimum) for rent, support staff, auditors, lawyers, insurance, and any “private jets” that Guy imagines, and you’ve got the total allocable to investment team compensation (salary, benefits, etc.).

Let’s take Guy’s firm, Garage Technology Ventures, for example. They’ve raised a first fund rumored to be $20M (with CalPERS as the “principle [sic] limited partner”), and possibly a second fund. Let’s assume that there’s a second Garage fund of $40M. That would bring total AUM to $60M; 2.5% fees would gross $1.5M annually for the firm. Let’s slice off 25% for rent, etc. — now we’ve got $1.125 M. Garage has three MDs and two VPs (venture partners); let’s assign the MDs 3x the salary of the VPs (who are probably part-time). That gives us 11 units of salary from the $1.125, or roughly $300k per MD and $100k per VP. Don’t forget that a chunk of that goes out the window to the employer costs of payroll taxes and benefits, so you’re probably looking at base salary to the MDs of more like $200k and to the VPs of perhaps $75k.

That took about three minutes (and I don’t even have a Wall Street I-banking background!). Admittedly, Guy’s firm is a remarkably small VC in terms of assets under management. Still: would any sane ex-banker think he has a shot at $500k base by going to work for Guy or any other VC?

Clearly, nobody is asserting these silly ideas (except Guy’s man of straw). This brings us full circle back to the straw man’s original plank: that VC is a great way to learn entrepreneurship. Well, precisely, this is false, and we must grant Guy that concession. There are a thousand things an entrepreneur must do that a VC associate, no matter how duly diligent he may be, will never observe him in.

But merely because the VC vantage point is insufficient to learn entrepreneurship does not mean that it cannot be helpful. Indeed, to the extent that raising investor capital (from someone other than your inner circle) is something you foresee doing, being on the VC side of the table is remarkably helpful. I speak from experience here: I roughly bootstrapped two startups using a combination of the five F’s: Friends, Families, Fools, Physicians, and Float (off of credit card convenience checks!). Yet my knowledge and ability concerning raising investor capital was nil. After my time so far at Voyager, I now have a relatively huge sample size to see what works and what doesn’t (and why!) in investor pitches.

Now: if I had spent the last two years pitching VCs, would I have more and different knowledge about entrepreneurship than that which I gained listening to such pitches? Certainly. And it’s almost undoubtedly better for the skill of raising capital to actually practice raising it than to observe others pitching you. But to the 25-year-old entrepreneur without a “base hit” or previous connection to the venture industry, practicing raising VC by just doing it isn’t ge
nerally a realistic option.

Guy also ignores the fact that a VC is supposed to be different from an entrepreneur. They operate on different logical levels; a VC must be at a meta-level to the entrepreneur’s. Meta-level occupations, such as consulting or I-banking, prepare individuals for this by having them view many businesses and compare among them for patterns, valuations, etc. It’s the difference between being an antiques appraiser and being Carl Faberge.

A better and more useful caveat to young VC position-seekers is simply to remark on the dearth of positions available. There are, to a first approximation, no jobs in VC. If VC wants you, it’ll find you; if not, you’re almost certainly better doing something besides quixotically questing for a junior venture job.

That said, I chose VC as a detour on my route to entrepreneurship. Although I wasn’t originally looking for VC as a next step, it was recommended to me by one career advisor around the same time as I learned of an open position looking for an analyst with operating experience. The money isn’t princely, but it’s steady. The learning isn’t everything I’ll need to succeed, but it’ll help. And frankly, it’s absolutely a blast and the next best thing to starting my own new company.

A final note: a subtext to Guy’s entry and its comments implied that junior VC personnel were all young whippersnappers who couldn’t hold a candle to the grizzled but worldly wise entrepreneurs they worked with (and that they ought to hold their tongues besides!). That thought is OK, I guess: I certainly am humbled when I have to communicate a pass to a repeat entrepreneur who’s sold more companies than I’ve founded. But seriously: if you’re a tough, worldly entrepreneur who gets offended by talking to some young VC associate, you need to suck it up and give less of a shiitake about what us whippersnappers say.

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