Venture Capital and Tech Background
Since our product’s target users are Chinese venture capitalists, I had the chance to talk to a wide range of VC professionals, from seasoned general partners to first-year analysts. I also have quite a lot of friends who work in this industry: some have strong tech background while others don’t. Although people from both groups enjoy different levels of success in their investments, I cannot help but draw the conclusion that tech background is not really necessary for a successful VC.
No Longer a Deciding Factor
There are different reasons behind this, but the most important one is the fact that technology is no longer a deciding factor in the success of a startup. Even though there are some startups that compete mainly in technology (e.g. driverless cars), most startups simply don’t. They compete in business models, market and growth strategy, operation efficiency and even ability to fund itself. A strong tech team will definitely help but is not really a deciding factor.
Technology has become a commodity. It’s difficult to tell the difference in technology among startups as most of them are open source. And It’s very common to find out that competing startups use similar tech stacks, and even the same frameworks/libraries. Nowadays it’s rather rare that a startup will rely on proprietary technology to gain competitive advantage.
A startup’s tech capability is always changing and evolving, so doing a “technology due diligence” hardly matters, especially in early stages. Oftentimes, a startup can easily make up for their weakness in technology by some key hiring, funded by more investment. A typical example is DiDi, the Chinese ride hailing giant, whose version 1.0 is outsourced. The app was a user experience nightmare and had experienced frequent failures. Still, this didn’t stop DiDi to become almost a monopoly in this market.
Pride and Prejudice
One of the most common pitfalls for a VC with tech background is to form a biased first impression towards a startup based on its technology. First impressions are important, not only for the party that tries to impress, but also for that party that tries to evaluate. One of my friends told me he missed a deal because he learned that the team was using PHP. Even though it was not a deal breaker for him, he did not pursue the deal as closely and lost the deal to a competing VC. The company went on to become quite successful, and most ironically, it had rewritten away from PHP.
Fallacy of Shared Background
People with shared background are easier to become friends. So one can argue it’s easier for a VC with tech background to befriend a tech founder. Even though this is largely true, it has down side. It’s quite well known that tech people can easily get into ideology disputes. So by making heavy use of the tech background, there is a higher risk of actually leaving a bad impression. Again, this is rather subtle - usually not directly a deal breaker, but it does make difference.
The Big Picture
People with tech background usually have pretty good critical thinking skill, which is usually helpful. However, there are traps. One is that the initial meeting could be turned into a “tutorial” where founder tries to explain the technical details, which, as mentioned before, does not really matter that much. This can also frustrate the founder if the communication does not go well. Another trap is that by going into the technical details, a VC can miss the big picture, not getting enough information on more important business questions.
Hard to Evaluate
For those “real tech” startups (i.e. deep learning, hologram, etc), the tech background has very limited help in evaluating those technologies. I was once asked to sit in a series of meetings with real tech startups. I found out that without being the expert in the field, it was impossible to make any confident judgment. All the conclusion I draw from the meeting was based on team background, demo product or paper citation - none of them really need any tech background.
So to conclude, I am not arguing that tech background is useless for a successful VC but I don’t think it’s necessary. While tech background can definitely help, other qualities have a much bigger impact.