The VC World Returns to Its Operating Roots

"You can't go into Compton to rehabilitate gang members if you haven't been a Crip." — Ben Horowitz, co-founder of fast-rising venture outfit Andreessen Horowitz.

Twenty years ago, the typical VC looked like a traditional banker, complete with an MBA and a background in finance. But a Wall Street background is becoming increasingly rare on Sand Hill Rd. The most coveted VCs are people who have built and scaled businesses, and who are deep in a particular domain. Why the shift?

Gang references aside, Horowitz explains that you can't give founders great advice unless you've actually been down that path yourself — a path that is often filled with hardship and struggle.

Horowitz speaks from both sides of the coin. He advises his portfolio with the same teeth that were cut through co-founding enterprise company Opsware, and later selling the business to HP for $1.6 billion. One of his board members, Bill Campbell, brought the same level of operational experience from Intuit, Kodak, and Apple that Horowitz now brings to his companies. Horowitz describes Campbell's experience-backed advice as "incredibly powerful".

The advisors and investors you surround yourself with will be the people you rely on when times get tough, he says. When Horowitz had to do his first round of layoffs at Opsware, he turned to Bill for advice. "Being able to talk to him and understand how to do these layoffs in the right way, I didn't kill my company and people felt like they were treated fairly." In fact, some of the staffers Horowitz laid off at Opsware now work with him at Andreessen Horowitz.

"Having that kind of advice and support system built into the agreement when being funded is a great opportunity for any entrepreneur," says Horowitz, whose co-founder at the firm is Marc Andreessen, co-founder of Netscape and Opsware. The firm's other partners include John O'Farrell (exec at Opsware and Silver Spring Networks), Scott Weiss (co-founder of IronPort), Jeff Jordan (CEO of OpenTable, eBay/PayPal exec), Peter Levine (CEO at XenSource) and Chris Dixon (co-founder of Hunch and SiteAdvisor).

Other firms are also shoring up their operational talent. Peter Barris, managing director of venture firm New Enterprise Associates, entered the VC space in 1992 after leading two companies to massive acquisitions. "I came out of the operating world, and I was the exception not the rule. Now I'm the rule not the exception."

Barris adds that in the 1990s the typical VC was a generalist in the largest sense, and now VCs are more focused on certain areas of technology. He attributes the current oversupply of VC dollars as one of the reasons why operating expertise is so much in demand right now. "In 1992, dollars were scarce and VCs were distributing to a big demand set. Now there is an oversupply of investment money, and the way VCs are competing is based on value. The operators and VCs who have domain expertise can help startups grow much more than generalists," he explains.

Foundational Capital's Paul Holland says that in this era of the discriminating entrepreneur, the founder "doesn't just want to get money from an investor; he or she wants the investor to be a successful entrepreneur, who's seen the movie, and will help guide them down that path."

And it's not just presence of experience, but the content of that experience. Steve Herrod, the former CTO of enterprise and virtualization giant VMware who just joined General Catalyst says that in his limited experience in the VC world, he's observed that entrepreneurs are judging investors based on what specific domain expertise they can provide.

Greylock's John Lilly is a strong example of an operator with domain expertise. Prior to joining the firm in 2011, Lilly served as CEO of Mozilla, founded and ran Reactivity, and was a senior scientist at Apple. "We're a big believer in operators at VCs, and because we are all product folks by nature, we obsess about how you build big companies," Lilly tells me. He also predicts that there will be certain VCs you go to for design, certain VCs who attract cloud-based enterprise investments, and specific VCs who are known for products dealing with networking.

Every investor I spoke to believes that we're headed towards a world where nearly all VCs will have built companies. If that's true, then can we expect the entire ecosystem to reach a higher level of empathy? Reflecting on his own days as an operator, Horowitz tells me that when entrepreneurs "get one out of five things right in a given day", it's hard to talk to an investor who simply doesn't empathize with the complexities of the role.

In a way, Horowitz explains, the VC world is going back to its roots in the seventies. Sequoia Capital founder Don Valentine previously founded National Semiconductor, and was an executive at Fairchild Semiconductor. Kleiner Perkins Caufield & Byers' founder Eugene Kleiner was a founder of Fairchild, while Tom Perkins was an early HP executive.

They drew on their operating experience to cultivate and invest in a new generation of entrepreneurs, and now Horowitz, Lilly and others are paying that expertise forward. In a noisy and highly competitive ecosystem, there's something pure about operators helping operators.