The Venture Capital Aptitude Test (VCAT)
If you want additional proof that we’re in a bubble, here it is: young people are trying to get into the venture capital business again. I get several emails a week along these lines:
I’m about to graduate from college where I majored in economics. I’ve always been interested [what does “always” mean for a twenty-something year old, but I digress…] in business and entrepreneurship and ran my school’s entrepreneurship club. I’ve been working as an analyst for Goldman, Sachs, and now I’d like to get into the venture capital business to further my understanding of entrepreneurship and to help startups achieve success by tapping into my knowledge base. I am adept with PowerPoint, Excel, and PhotoShop.
They see a wonderful job: going to cocktail parties and networking events, flying in private jets, and getting sucked up to by entrepreneurs while pulling down a base salary of $500,000/year plus a piece of the upside of selling a YouTube for $1.6 billion. Who wouldn’t want such a job? (Frankly, I would too.)
First, a rare moment of Guy-Kawasaki humility: I am by no means “proven” as a venture capitalist. I’ve been in this game for about ten years, but I don’t have the mega-hit that “makes” a fund. Thus, I may not be a source of good advice about getting into this business, but when has the lack of knowledge stopped a blogger?
Regardless, here’s my advice to all the Biffs, Sebastians, Brooks, and Tiffanys who want to be kingmakers:
Venture capital is something to do at the end of your career, not the beginning. It should be your last job, not your first.
My theory is that when you’re young, you should work eighty hours a week to create a product or service that changes the world. You should not sit in board meetings listening to an entrepreneur explaining why she missed her numbers while you read email on a Blackberry and intermittently spew forth gems like, “You should partner with MySpace; I can also introduce you to a few of the losers in our portfolio.”
Furthermore, entrepreneurs should view any young person who opted for venture capital over “real world” experience with contempt. Why would you want advice from someone whose background consists of working in a college bookstore or cranking spreadsheets at an investment bank? Financial models are almost totally irrelevant because there’s no financial wizardry involved in making a good product and selling the heck out of it.
I’ve concocted the Venture Capital Aptitude Test (VCAT) to help people decide whether they are right for the venture capital business. If you’d like to take this test online, click here. My buddies at an interactive agency called Electric Pulp created the test for me. Knock yourself out!
Part I: Work Background
What is your background?
- Engineering (add 5 points)
- Sales (add 5 points)
- Management consulting (subtract 5 points)
- Investment banking (subtract 5 points)
- Accounting (subtract 5 points)
- MBA (subtract 5 points)
The ideal venture capitalist has an engineering or a sales background. Engineering is useful because it helps you understand the technology that you’re investing in—for example, is the entrepreneur trying to defy the laws of physics? Sales is useful because every entrepreneur has to introduce a product and sell it. For the third time in this blog, let me say, “Sales fixes everything.”
The three worst backgrounds for a venture capitalist are management consulting, investment banking, and accounting. Management consulting is bad because it leads you to believe that implementation is easy and insights are hard when the opposite is true in startups. Investment banking is bad because it leads you to believe that everything can be reduced to cells on a spreadsheet and that companies should be built for Wall Street, not customers. Moreover, investment bankers are oriented towards doing deals, not building companies. Accounting is bad because it leads you to believe that history not only repeats itself, it predicts the future.
Finally, there is the issue of the pertinence of an MBA to venture capital. The upside is that such a degree can provide additional tools and knowledge (such as calculating that 25% of $1.6 billion is $400 million) to help you make investment decisions and to assist entrepreneurs. The downside is that earning this degree (and I have one) causes most people to develop the hollow arrogance of someone who’s never been tested. All told, the downside of an MBA outweighs the upside.
Part II: First-Hand Experiences
You may have been in the right places, but you also need the right experiences in those places. Specifically, have you gone through these?
- Been kicked in the groin by a major, long-lasting economic downturn, so that you know how powerless you are. (add 1 point)
- Worked at a successful startup, so that you can speak first-hand about the ecstasy of entrepreneurship. (add 1 point)
- Worked at a failed startup, so that you understand three things: first, how hard it is to achieve success; second, that the world doesn’t owe you a thing; and third, what it’s like to be fired or laid off. (add 3 points)
- Worked at a public company, so that you know what the end goal looks like, warts and all. (add 1 point)
- Held a CEO position, so that you have this fantasy experience out of your system and will not try to run the startup from a board position. (add 2 points)
- Been an angel investor with your own money, so that you understand the fiduciary responsibility of investing other people’s money. (add 2 points)
Part III: Necessary Knowledge
Finally, can you answer these questions for entrepreneurs? Because this is the kind of advice that entrepreneurs need. (Don’t worry: many current venture capitalists would fail this part.)
- How do I introduce a product with no budget? (add 2 points)
- How do I determine whether there’s really a market demand for my product? (add 1 point)
- What do I do if customers hate our first product? (add 1 point)
- How do I get Walt Mossberg to return my call? (add 2 points)
- How do I get to the folks who run Demo? (add 1 point)
- How do I get a plug in TechCrunch? (add 1 point)
- How do I get the folks at Fox Interactive to return my call? (add 1 point)
- How do I dominate a segment when there are five other companies doing essentially the same thing? (add 2 points)
- How much time, energy, and money should I spend on patent protection? (add 1 point)
- We bet on the wrong architecture for our product; what do I do now? (add 2 points)
- What kind of people should I hire: young, old, unproven, proven, cheap, expensive, local, remote? (add 1 point)
- How do I get them to leave their current jobs without throwing a lot of money at them? (add 2 points)
- How do I tell my best friend that he can’t be chief technical officer just because he was a cofounder? (add 2 points)
- How do I get to the buyer at BestBuy to return my call? (add 1 point)
- How do I handle a customer who wants to send back his purchase for a full refund? (add 1 point)
- How do I fire people? (add 2 points)
- How do I lay people off? (add 2 points)
Here’s how to assess your readiness to become a venture capitalist:
- 40 or more points: Call CalPERS and tell them you’re raising a new fund.
- 35 to 39 points: Call Sequoia and Kleiner, Perkins and tell them that you’re available.
- 25 to 34 points: Send your resume to 2,000 venture capitalists and pray.
- 24 points or less: Work until you can score higher and keep flying on Southwest Airlines.
Here’s the bottom line: You should become a venture capitalist after you’ve had the shiitake kicked out of you. This will yield at least two positive results: First, you’ll stand out from the full-of-shiitake artists who entered the business when they were young. Second, you’ll really be able to help your portfolio companies—which is what venture capital should be all about. See you in ten or twenty years.
Read more venture-capital tips and tricks.