Why VCs don’t make great entrepreneurs

Entrepreneurs seem to be well positioned to turn VCs. In the West, the likes of Vinod Khosla, Peter Thiel, Marc Andreessen, Ben Horowitz, and Eugene Kleiner did exactly that. Back home, many of India’s most prominent VC funds have also been founded by exentrepreneurs.

Oddly, though, when it comes to recalling VCs that have turned entrepreneurs and successfully created a truly large business, we might find ourselves thinking long and hard. Notable exceptions include Manoj Gupta of Craftsvilla, Andy Rachleff of Wealthfront, and Louis Beryl of Earnest. And if we were to significantly expand our scope to look for an outlier, we would find Jeff Bezos, who worked at the hedge fund DE Shaw before founding Amazon.

So what explains the disparity in VCs becoming successful entrepreneurs? First, a disclaimer: entrepreneurs have always outnumbered VCs. So, drawing conclusions based on comparisons between these two differently sized groups might well be fraught with sampling bias.

Read Also: Becoming an entrepreneur: Investors watch, founders act

Now let us examine the top three differences between VCs and entrepreneurs that make it difficult for VCs to become successful entrepreneurs.

Portfolio approach vs Going “All In”
One of the cornerstones of a VC’s approach is to create a portfolio of investments. The underlying thought process is: Create as many opportunities to capitalise on the upside, while hedging the downside of companies getting written off. In fact, most funds incorporate this philosophy by ensuring that no single investment is allocated more than 5–10% of the fund.

By contrast, an entrepreneur gets one shot at using his/her time and resources to create a successful company. By definition, (s)he has chosen to go all in with his/her risk completely unhedged.

Milestones vs Vision
VCs come in with a finite investment horizon. The looming threat of time running out creates a structured and metricised approach. On the plus side, this helps create focus and discipline. But, on the flip side, it can lead to chasing shallower objectives, such as raising the next round of capital, or a purely ‘by the numbers’ approach where the entrepreneur’s founding vision is laid to waste. Successful entrepreneurs know that success rarely takes the form a highly structured and sanitised path, and is not to be measured in short investment horizons, nor by immediate funding rounds.

Formulae vs Chaos
VCs demonstrate great faith in being able to predict market trends and in their own skill at picking winning investments.

In his landmark book, Thinking, Fast and Slow, Nobel-laureate Daniel Kahneman describes his statistical assessment of the performance of 25 investment advisors over eight consecutive years, to find traces of persistent differences that could be labelled “skill”. He found the average of 28 possible correlations to be 0.01, which means the investments made and their outcomes were nearly as random as a throw of the dice.

Also Read: When funders turn founders: What happens when VCs don the entrepreneurial hat

Ask any VC about a blockbuster investment and (s)he will always have a coherent story that seems to fit a pattern of predictability. However, the undocumented truth is that the same VC would also have had a similar story for the investments that went nowhere (which typically account for 80–90% of the portfolio).

An entrepreneur knows that the dots are only meant to be connected in the future, and there is no way to predict the outcome amidst the randomness and chaos. When an entrepreneur makes the transition to being a VC investor, (s)he is choosing a career that is less risky, more structured and more formula-driven. But when a VC decides to turn entrepreneur, (s)he is venturing into a world that is riskier, more chaotic, and needs firm conviction in one’s own vision.

One path is infinitely harder than the other.

(The writer is an entrepreneur turned VC at Kae Capital, and author of VCs are from Venus, Entrepreneurs are from Mars.)