Operator VC versus Investor VC
14 mins listen

Addressing the much debated question of who makes a better venture partner - operators or investors? Tarun Davda, Managing Director, Matrix Partners India, talks about his journey of transitioning from an intrapreneur to a venture investor, what his experience has been like having been on the other side of the table as an operator, his views on both types of venture investors: operator VCs and investor VCs and the biases that come with each.

Operator VC vs Investor VC

Salonie: Hi and welcome back to Matrix Moments. This is Salonie and in today’s episode we’re going to be talking about Operator VCs versus Investor VCs. Joining us today to discuss this is Tarun Davda, Managing Director, Matrix Partners India. Prior to Matrix, Tarun has previously been an intrapreneur and successfully led two internet businesses – StepOut and BigRock.com. So Tarun, having been on the operational side of a business what made you make the shift to the other side and how did you actually decide to get into the business of venture investing?

Tarun: Well, to start with I thought it would be easier and I realized the hard way that it's not, but jokes apart I think you know, and I have learnt this now being on the other side for some time that, very often the entry into VC is completely accidental and when you least expect it and my experience was very similar. So, the way it worked out in my case was, I was actually running StepOut, pitching various Series B investors to raise my Series B round of funding. In that context met a bunch of venture funds both in India and in the US. Met Avnish at Matrix in that context, actually hit it off with him, thought he had ask some of the smartest questions understood the business really well. We spent some more time actually doing more elaborate discussions on the business, exchange data requests and all through the process I was super impressed that there was somebody who got the company and got what we were building. For various reasons, you know although, Matrix was interested in investing at that time, we didn’t go ahead with the investment and this was more from sort of our side but you know that interaction left a very good impression in my mind in terms of the kind of work and the quality of team that Matrix had at that time. Our fund raise actually, didn’t go off smoothly after that and so we decided that it would actually make sense to actually sell the business, So, we ended up selling the business to www.match.com 

Avnish and I continued to stay in touch and at some point he said “Hey what are you thinking about next and is this something that you would like to explore?” I had no idea what venture was, I can't claim to say that I have any better idea today, maybe a little bit more but it actually was kind of you know, we have enjoyed the conversations, we think, and this was back in 2012  there very very few people who had got some experience from the operating side and early days of venture startups in India and so, I was very hesitant initially. But the pure bet that I took was on the people. I had great discussions with Avnish and the rest of the team at Matrix. I felt that I didn't have any sort of burning desire or burning idea at that time and so I said “ok let me give this a shot and see if it works”. So, it actually started you know, that’s how the journey started. My learning over time at Matrix has been that, you start enjoying the venture business when you are in business with some quality founders, otherwise the business can get very dull and you know, seem like a treadmill and so, I have been fortunate to have worked with some great founders. So, that's how I got in.

Salonie: So there is a lot of talk around the word operator turned VCs and the pros and cons that are actually tied to this. In Silicon Valley we have Kleiner Perkins and a16z that are classic examples of successful operator VCs. What is your view on this and do you think that being an operator in your past life significantly helps in this business?

Tarun: So I don't think there is any sort of, you know, single formula for success. In any business and venture is you know just one of the businesses. I think there are enough archetypes on both sides of what it takes to you know be a successful investor. If I look at sort of you know, the operator VC archetype, you mentioned Kleiner and you know Andreessen in the US. There is a bunch of others, if you look at First Round and some of the senior partners on the team are ex-entrepreneurs. If you look closer back home obviously Avnish, was an entrepreneur, successfully built and sold Baazee to eBay. Suvir from Nexus was also with him as a co-founder, Bejul from Lightspeed from what I know ran a couple of companies. Shailendra from Sequoia, K. Ganesh from Growthstory, couple of the partners at Prime Venture. So I think there’s examples of successful entrepreneurs or operator VCs in India. On the flip side, I think there are enough examples of successful non-operator VCs. You know people who have come from more consulting, financial services/banking background. And so if you look at Michael Moritz, John Doerr or Bill Gurley in the US - all of these are extremely successful investors but haven’t really built or run companies themselves. If you look closer back home, Ravi from SAIF has been very successful, he's been more on the financial service and banking and consulting side, right? So, I think, there are examples of success in both ways. In both I think one can build success, coming from either side, I think the way I think about it is that there are multiple formulas for success one just needs to find their own formula in terms of what works and stick to it.

SalonieSo, on one hand an operator VC can always tap into the insight and expertise that they have from being an ex-entrepreneur, and on the other hand there’s always the risk of you know slipping back into operator mode and trying to micro manage and get over involved with your startup and founder. So, have you ever been in a situation like this where you have had to hold yourself back so as to not be back seat driving with your founder or it’s not actually been like that for you?

Tarun: So look I think let me start with, what I think I some of the advantages of operator VCs right? One is, I think by definition you tend to have a little bit more empathy because you have been in that position, you have seen what it is like to you know run a company,  you have seen what it's like to go through all the you know difficult times that an entrepreneur faces, an entrepreneur has all the eggs in one basket, you have been through that journey so there's a lot of humility and respect for the journey that any founder is going through whether things are going well or whether things are not going so well, there's a lot of empathy. So, I think that is definitely one advantage. The second is more obvious which is you know you’ve got a bunch of experiences that you have been through as an operator, a lot of mistakes that you have made and you can pass on some of those learnings to founders, especially in the business we are in which is early stage venture, a large number of founders that we back are either running their first gig or are very young and literally this is their first attempt at something professional right? young graduates who are starting out, and so definitely there is a lot more that one can help, you know in terms of strategic direction, how to think about a particular issue, hiring and a bunch of other things. So, I  think those are all the advantages. What are the pitfalls? And I think this is where Avnish when I had joined was very, very helpful because he had been through some version of the journey himself and what he had told me, I still remember and I would broadly categorize that in three buckets. The first, and I can't say that I have avoided all those pitfalls but I’ve tried to be cognizant of them and I have tried to check myself when I’ve felt that I’m getting drawn into one of those pitfalls. 

The first one was backing ideas and not backing people, as an operator VC, one tends to get overly excited by an idea because at the back of your mind somewhere you’re saying “I can see how one would execute against this idea” and then you very quickly realize that as a VC you’re not the one executing it and it is actually the entrepreneur and so the entrepreneur needs to be able to see how that idea would be executed because over time as a VC you are going to be involved in you know in 10-12-15 companies. You are not going to have time to keep up with the how quickly the businesses is evolving and you are not going to have the time to keep up with every minute detail, you are not going to be hiring the team, you are not going to be setting strategy you know, weekly tactics stuff like that, and so, you quickly realize that even though the idea makes a lot of sense, you probably backed yourself and not the person who is going to be running it. So, that is one pitfall. I think, there have been examples where I have done that and you know it is not, it has not gone as well and so, that has been clearly one learning. 

The second one is that, there is a bias early on, I think I feel that less today but in the early days there is a bias to get too involved and I think that comes with different set of issues right? The first, is that one of the biggest advantage that you have as a VC is that you’re able to you know, stay away from the day to day detail and that gives you a lot of perspective by observing things from a distance. You tend to be less emotionally involved, you tend to be less involved in day to day minutiae of what’s happening and by definition it gives you a sort of broader perspective of where things are going. You tend to lose that, if you get too involved. The second is that, best founders just don’t like it, they just want you to stay away. You know, you have put your faith in them, you know, you have backed them for all their positives and negatives and they expect you to then trust them in building the company the way they would want to be built and some times by staying too involved there is going to be natural disagreements and it’s not something that one wants to get into. I think the way we had solved that at Matrix, I still remember when I had joined, Avnish was very clear in the first twelve months he said “No portfolio work until you spend at least twelve months sourcing yourself” and so, I remember for the first maybe 9-12 months I didn’t attend a single portfolio meeting, I didn’t get involved in any work related to any of the companies that Matrix had already invested in and in some ways it was more like “hunt what you eat” so, go out there, source deals, meet people, find somebody that you want to back and that’s when you get involved in helping build a company. I think I was fortunate that for 9-10-12 months that I stayed away from getting ~ it was extremely hard because as an operator you are used to seeing results every week, every two weeks and there is something happening, you are running some marketing campaign and you are seeing some experiment working or not working, as an investor all you are doing and it was very hard for me to adjust initially, because month after month, all you are doing is meeting hundreds’ of people but at the end of the month you ask yourself “what do I have to show for it?” there is nothing and it stays that way for you know, one month, three months, six months, nine months and suddenly you start getting very, very impatient but you know, that initial phase, did help me correct that early urge I had of getting involved too deeply with any of the portfolio companies. The last one I think, you used to word “micro manage” and I think that is a real risk, I think that if I look at sort of companies that I work with or founders that I work with, hopefully none of them will say that I get too involved or I micro-manage but I don’t feel I do and honestly, I enjoy engaging with them at the level that I engage today versus going too deep for all the reasons that I mentioned but that is another risk and there are operator VCs who are very successful by the way but tend to focus a lot more on getting deep into companies and that formula has worked from them. I just don’t think that is the DNA for Matrix, we tend to be a lot more foundersfirst! in the way we think and we tend to be a lot more “here is this person we’ve backed” and while we are helpful we never want to be coming across as telling the founder what to do because you then run the risk of tilting the relationship very early into an instructor and a follower kind of relationship where you are telling them what do and they are just following instructions and I think that is a classic mistake that one can make. The idea is, I see the role of an investor as guiding, coaching, asking the right questions but eventually helping the founder get to the answer versus giving the answer because I think that is, you know, a dangerous territory. 

Salonie: Thanks Tarun. Thank you for listening and you can find the transcribed version of this podcast on www.matrixpartners.in. You can also follow us on Twitter and LinkedIn for more updates.