Do (ex) Devs Make the Better B2D Investors?
Know this about the tech savviness of your B2D investor before you tie the knot
As an investor with a (boring) finance background, this is a question I continue to ask myself - do I need to be a software engineer, data scientist, or product manager to be a good B2D investor? (Existential identity crises incoming 🤪).
Luckily, there are great examples of investors I admire on both sides of the spectrum.
On the technical end of the range we have icon Ben Horowitz, who after graduating with a CompSci degree at Columbia and UCLA and working in engineering and PM roles, went on to not only found one of the most prestigious venture firms, but also do several great B2D investments, such as in Databricks or Okta. With a Maths and CompSci degree from Stanford, Benchmark’s Eric Vishria has just as much of a technical academic background, albeit having worked in rather commercial roles before entering the world of venture. He’s widely recognized for his B2D investment in Confluent.
On the other end of the range we also have big names such as Fred Wilson of USV. While a mechanical engineering degree probably still helps for his tech savvy, Wilson always worked in investment roles, never on the engineering side, and still managed to shine with B2D investments in e.g. MongoDB. Famously known for his MAD (Machine Learning, Artificial Intelligence & Data) Landscape, Firstmark’s Matt Turck with a handful of promising B2D investments in companies such as Cockroach Labs or Dataiku, surprisingly is a lawyer by training and worked in tech sales before turning investor.
So today I want to lay out my arguments on why I believe that 1) it is not necessarily needed in order to make good investment decisions and to be helpful to your portfolio companies post-investment, but 2) why it is definitely still helpful in many dimensions, for both the investor themselves as well as their portfolio founders.
Why your B2D investor does not need a CompSci degree and years of software engineering experience
As one of my colleagues likes to say: “VC is predominantly a finding and picking the winners game”. So let’s see who is best at picking these winners.
What even impacts an investor's performance?
Unfortunately, there is no targeted study that researches the impact of a technical degree or technical work experience on B2D investments that can give us clarity on the difference in performance it makes.
However, we can maybe learn a little something from a similar study conducted by CB Insights that looked into the relationship of a venture capital investor’s background on a broader level and how it relates to their success as an investor.
Here, the investors were grouped depending on if they founded or co-founded a company before turning investors or not. The study found that:
The data does not support the notion of “founders make the best VCs” - most VCs’ rank in the top 100 had no relationship to their previous experience as an operator
There is also no relationship between investor’s years of experience as a VC and their rank
Cbinsights: Do Ex-Startup Founders Make The Best Venture Capitalists
Given these findings and knowing that being an ex-founder does not make you a better investor, it would rather be a surprise if B2D investor success and previous engineering experience and the nature of one’s degree highly correlate.
Don’t get lost in the nitty gritty
In early-stage investing, you constantly have to balance going deep into a specific segment and understanding individual concepts in and out, while still keeping the higher-level birds-eye view.
I’ve seen the risk for technically superb investors to have a tendency of focusing most of the time they can spend with a founder and their subsequent analysis digging into nitty-gritty technical peculiarities while knowingly or unknowingly spending less time on often just as or even more relevant topics such as competition, G2M, and the like.
Keeping up with the speed of change
A regular answer I receive from VC peers with a CompSci background when I ask them about how much they believe it impacts their work on the investment side of things is: “All the stuff I learned in university 5 years ago does not help me now as the tech stack has evolved so much in the meantime, and the way of how teams work on building applications is so different now”. So it seems that beyond the basics and a certain cold start problem, it’s tough for anyone to familiarize themselves with new unseen concepts.
In fact, research shows computer science occupations are the jobs with the highest skill turnover, by far. So needless to say, B2D is a rapidly changing field.
David J Deming , Kadeem Noray, Earnings Dynamics, Changing Job Skills, and STEM Careers, The Quarterly Journal of Economics, Volume 135, Issue 4, November 2020, Pages 1965–2005, https://doi.org/10.1093/qje/qjaa021
Founders know best
In the end, I think for any B2D investor one even hopes to find a founding team pitching a company where one reaches a limit of understanding. Yes, we want to have the best possible basis for our investment decisions, in order to back the right teams and topics and fulfill our fiduciary duty. But in the end, it is also a great signal of one gets the feeling that a founder is the single best expert for what they are building and that no expert reference in the world could know better.
Building a successful startup is about more than tech & product
Even though the first 1-2 years in a start-up's lifespan will be coined by an almost exclusive focus on tech and product, eventually there is more to really build a successful business. At the latest when you start to engage with first design partners or potential customers, the focus will start to shift gradually. Typically post Series A when a mature core product is ready to be scaled, the team's emphasis will turn mostly towards G2M and sales & marketing.
Startups don’t primarily fail because of bad/wrong tech
Looking at another CB Insights study that conducted a post-mortem analysis of 111 failed startups shows that the primary reason startups fail is because they run out of money. Sounds blunt and obvious at first glance? Well, it seems this reason is more the symptom than the underlying illness and several factors can play into this. But poor tech is typically not the primary reason why startups fail to raise new capital.
CB Insights: Top 12 Reasons Startups Fail
Why I still firmly believe there is value in being a specialized B2D investor
Don’t get me wrong. I am not trying to make a case that devs cannot be the better investors, but instead that I believe there to be a middle course. Therefore, here are some of my reasons why I believe it is great to have a deep technical understanding if you invest in data/dev/AI.
You will want them to understand your product well enough
In venture, you’ll often hear that choosing an investor is like choosing whom to marry, followed by fun facts comparing the average VC holding period to the duration of the average marriage and the like. In a sense though I would agree that you should get to know your counterpart before such a long-binding decision. In the case of choosing a company and founder to work with, a deep understanding of the product, its future roadmap, the vision behind it and all its intricacies is so fundamental that I would not want to miss to really deeply contrive it. For rather technical products, technical affinity will obviously be helpful. This also allows for much more engaged conversations in founder calls and during due diligence, and one can cut the high-level derivation if the investor already comes to the table with a prepared mind.
For fast decision making a prepared mind is necessary
Fundraising is a pain and it takes all of a founder’s time and capacity from running and growing the business for several weeks to months. Finding an investor who’s familiar with what you are building and up to speed regarding the space you are active in, allows them to be more “thesis-driven”, which in turn makes it possible to run a much smoother, leaner, and faster process as a lot of the leg work of the analysis has already been done in advance. This can save the company valuable time in getting back to business - and preparing for the next round obviously. After fundraising is before fundraising.
One needs to speak the same language
Shared values and beliefs are important when working together towards a common goal. These two often have a mutually shared language as the common denominator. In the world of B2D this language is one of technical expressions and quaint abbreviations, often displayed on abstruse dark screens with colorful cryptic text. Knowing and sharing this language as an investor helps, again, for a better alignment of discussion, but also simply to not shy away when an API-first product or one for which the UI is not yet built is shown in the terminal ;)
Post-investment roadmap guidance
For a venture fund with a more hands-on approach that typically takes a lead or co-lead position in a round, the work does not stop with wiring the money. The aim is also to provide added value post-investment via strategic board work, operative guidance, and the specialized support functions of the fund’s platform teams.
To meet this standard and for being able to be a good challenger, a sparring partner, to advice on strategic decisions, guide the product roadmap, manage the follow-on fundraise etc., I thus see it as vital to also be close to the core of the company, it’s product and tech.
The conviction that there is value in specialized investment teams and in technical and product understanding in B2D is also the reason why I started to spend a lot of time to make up for the lost opportunity to study a technical field such as computer science by working at the interception of tech and business as a product manager and why I now make up leeway through CompSci courses, coding boot camps, hobby projects and the like.