Andy Rachleff was recently on TWiST. If you haven’t seen the episode it’s a must. Andy was a long time VC for 25 years and a founder of Benchmark Capital. He made an interesting comment (about 20 minutes in) on what makes a great VC today. His assertion was that 90% of the value add of a VC is making the right investment decision. In a nutshell, to generate outsized returns a VC must invest in the right companies in the first place. His point was that VCs as board members don’t take mediocre or even good companies and make them great. He talked about how his introductions, contributions as a board member and value add might have possibly improved a 3x return into a 6x, but not into a homerun of 20x or 30x.
It’s unpopular to say this, but Andy is right. It’s not that VCs don’t add value (maybe that’s true for some) and even significantly impact a company’s trajectory. That’s not the case at all. Many VCs work very hard and do help their portfolio companies with recruiting, customer introductions, raising money, exit planning and advice. It’s that VCs, and all board members for that matter, don’t turn “singles” into “homeruns” by and large. eBay, Google, Microsoft, Facebook and many others would have been as successful regardless of the investor. These entrepreneurs found large, fast growing markets and achieved product / market fit at the right time.
Competition is intense to invest in the best companies and at a minimum a VC must be a good, value add partner to even get access to those opportunities. So while value add may not directly drive the outsized returns it is table stakes to be in the game. Some newer firms such as Andreessen Horowitz are taking value add to the next level, but time and ultimately LP returns will tell if that strategy pays off (it seems to be so far).
At the end of the day, great entrepreneurs drive the great outcomes not VCs.