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NOV 11, 2011

10 Steps to Be a Great Venture Capitalist

By A.J. Banner
Mr. Alan Patricof -- New York based legendary Venture Capitalist (Photos: Hiroyasu Mizuno)

Mr. Alan Patricof, New York based legendary Venture Capitalist, gave a special lecture as a pre-event of G1 Global Conference.  He said that Japan was a better place to invest with a greater IPO expectancy than in the U.S and said that entrepreneurship is critical to transform Japan’s society.

Most men, at 76, are enjoying their retirement, but not Alan Patricof, one of the “founding fathers” of the venture capital business in the United States. “I’m full of curiosity, love to network and I get great satisfaction out of having a role in building a successful business,” he says, during a lecture at the Tokyo headquarters of GLOBIS.

Based in New York, Patricof holds an MBA from Columbia Business School and a BS in finance from Ohio State University. He entered the venture capital industry in the 1970s with the creation of Patricof & Co Ventures Inc, a predecessor to Apax Partners – today, one of the world’s leading private equity firms with $35 billion under management. In 2006, he established venture capital firm Greycroft, which focus on digital media.

It’s no surprise that GLOBIS would ask Patricof to deliver an address on the topic “10 Steps to Be a Great Venture Capitalist.” His achievements over the past 40 years are impressive — he has helped build and foster the growth of numerous global companies, including America Online, Office Depot, Cadence Systems, Apple Computer, IntraLinks, and Audible. He was also a founder and chairman of the board of New York magazine.

Very down to earth, Patricof says he is not sure what a great venture capitalist is, but lists 10 essential characteristics that successful venture capitalists must have.

No. 1, he says, is Be Curious. “If you went to a dinner party and you saw an unusual plate, and turned it over to see who made it, that is a test to see if you are a curious person,” he explains. “If you extend that concept, if you are the kind of person who is curious about what’s going on and don’t take things for granted, that is an early precursor to someone who would probably make a good venture capitalist.”

No. 2, Patricof suggests, is to Be Focused. When Patricof started out, venture capital was a new industry in which VCs were looking for any opportunities they could find. “It was a new concept – the idea of sharing ownership. People couldn’t get the idea of taking in equity partners,” Patricof recalls. “Nowadays, the industry has evolved to developing expertise and deep relationships in a particular area. Greycroft is very focused on the digital media area and one of our strengths is our significant network

Mr. Alan Patricof — New York based legendary Venture Capitalist(Photo: Hiroyasu Mizuno)

in the digital and mobile area. Entrepreneurs want investment from people who know their business and do not want to have to educate them”

Be Disciplined is Patricof’s No. 3 tip. During the 1999-2000 bubble, discipline went out the window, he says. “VCs were backing people indiscriminately with no expertise or experience at running companies. They were too young to start businesses.”

The VC business was overfinanced and investments went from $100 billion in 2000 down to about $14 billion in 2010. The lesson to be learned from this, Patricof says, is that “you want to be an investor when the drums are rolling, not when the trumpets are blaring. When everybody is excited and can’t wait to get into the next deal, that’s the time to slow down and be careful. Trust your instincts.”

Looking at Japan, Patricof feels that now is probably a great time to be an investor as long as you use appropriate discipline. “I think that valuations will turn out to be very good. Based on my observations, Japan is a better place to invest with an IPO expectancy than in the U.S. Ten years ago, every company I looked at had an exit strategy by 2015 through an IPO. Today, the IPO market is limited in the U.S. You have to have a market cap of $300-400 million. My sense of Japan is that you can virtually make an appointment to take a company public. You can do small cap IPOs. Don’t get carried about by what’s going on the States with Groupon, Facebook, Twitter – there were probably 2,000 venture startups last year and of them, maybe only five will go public. The rest will get sold at some kind of trade sale.”

No. 4 is Cultivate Your Network, says Patricof. “Don’t sit at your desk. Follow up on meetings. That gives you the ability to focus on areas and call on resources that you need. The best deals come through your existing network. They are made with entrepreneurs who start new businesses in areas related to what they did before and where they attract people they worked with before. As a VC, when you have an extensive network, you can help the entrepreneur build a business and deliver introductions to the advertising and media worlds.”

Identify Talent is No. 5 on Patricof’s list. “We invest in people first, and the product second. Surround yourself with good people. Use the concept of venture partner – this is someone you add to your network from outside the firm. For example, we have five full-time people, three venture partners, and an advisory group of five CEOs,” he says. “A successful VC has the ability to inspire people, attract talent and helping the entrepreneur in recruiting talent.”

Venture capital is an Apprentice Business, says Patricof, referring to his No. 6 tip. “Venture capitalists are not made. You have to learn on the job,” he emphasizes. “It takes time to be able to judge what would be a good deal, what doesn’t work.”

Empower Entrepreneurs is No. 7. Many VCs become overpowering and try to run the startup business. “They get confused about their role is,” Patricof says. “If you get too aggressive, the entrepreneur may just give you the key to the front door and say, ‘Here, it’s your business.’ The entrepreneurs have to feel it is their business.”

However, a good VC should Develop Relationships With CEOs, Patricof says of his No. 8 tip. “A CEO’s job can be very lonely and a VC should be someone whom the CEO can talk to, confide in and get constructive advice from.”

In these difficult economic times, the No. 9 tip – Prepare for Adversity – is crucial. “I think of myself as a doctor of investment,” Patricof says. “Every day, one of my patients is dying, and it’s never the same patient two days in a row. There are lots of problems for businesses  – financing gets tight, people quit, the product doesn’t work. It goes with the business. You must be prepared to deal with that.”

Finally, at No. 10, Patricof advises venture capitalists to Enjoy Diversity. For example, if you want to be in the VC business, you have to like multitasking and be able to focus on many investment opportunities at the same time. “If you’re someone who can only focus on one thing at a time, don’t go into the venture capital business. You have to deal with different CEOs, attend meetings, help with recruiting, financing, be a good board member, help with business development.”

Listening to Patricof outline his 10 tips, you can’t help but notice how simple and basic they are, despite the risks of the VC business. The business principles he outlines are tried and true – trust your instincts, surround yourself with good talent, build a network, think out of the box, learn from your mistakes. But do his principles apply in other countries with different cultures? Can VCs transform a society?

“Yes,” Patricof says. “Entrepreneurship is critical to society today. New York and Los Angeles are exploding with start-ups, incubators, accelerators, meet-ups. The movement feeds on itself. Every startup increases employment as opposed to a buy-out which lays off people. Ultimately those companies that are successful, like Google and Facebook, spawn other startups. It is critical to have a vibrant startup community and I hope it is active in Tokyo.”

by A. J. Banner

What’s G1 Global?
The G1 Global conference, held on November 3, 2011, at GLOBIS University in Tokyo, was a daylong event where leaders from government, business, academia and the media got together to discuss challenges facing Japan, Asia and the world, and to discuss ways to reform and reinvent Japan after March 11. G1 was named based on the concept of “Group of 1 and the Globe is one”. All discussions were in English. GLOBIS.JP Beta will carry reports on most of the conference sessions in the form of text articles and videos.