At a special lecture at GLOBIS, Mr. Alan Patricof, the legendary venture capitalist, said that Japan was a better place to invest than the U.S with an IPO expectancy. He added that entrepreneurship is critical to transforming Japan’s society.
Most men at 76 are enjoying their retirement, but not Patricof. As one of the founding fathers of venture capitalism in the United States, he describes himself as being “full of curiosity… [I] love to network, and I get great satisfaction out of having a role in building a successful business.”
It’s no surprise that GLOBIS would ask Patricof to deliver an address on how to become a great venture capitalist. He’s been in the industry since the 1970s, when he created Patricof & Co Ventures Inc, a predecessor to Apax Partners – today, one of the world’s leading private equity firms with $35 billion under management. 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.
1. 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,” Patricof explains. “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.”
2. 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,” he recalls. “Nowadays, the industry has evolved to developing expertise and deep relationships in a particular area.” Greycroft, a venture capital firm he established in 2006, focuses on digital media. One of its strengths is a significant mobile network.
“Entrepreneurs want investment from people who know their business. [They] do not want to have to educate.”
3. Be Disciplined
During the 1999ｰ2000 dot.com bubble, discipline went out the window, Patricof explains. “VCs were backing people indiscriminately with no expertise or experience at running companies. They were too young to start businesses.”
The VC business was over-financed, 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.
“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ｰ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 [worry] about what’s going on the States … 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.”
4. Cultivate Your Network
“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.”
5. Identify Talent
“We invest in people first, and the product second. Surround yourself with good people. Use the concept of venture partners – 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,” Patricof says. “A successful VC has the ability to inspire people, attract talent, and [help] the entrepreneur in recruiting talent.”
6. Understand Venture Capital Is an Apprentice Business
“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.”
7. Empower Entrepreneurs
Many VCs become overpowering and try to run the startup business. “They get confused about their role,” 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.”
8. Develop Relationships with CEOs
“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.”
9. Prepare for Adversity
“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.”
10. Enjoy Diversity
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 and financing, be a good board member, help with business development.”
Listening to Patricof outline these 10 tips, you can’t help but notice how basic they are, despite the complex risks of the VC business. The principles he outlines are tried and true: trust your instincts, surround yourself with good talent, build a network, think outside the box, learn from your mistakes.
But do these 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 [the community] is active in Tokyo.”