A Taxonomy of VC's

A handy guide for entrepreneurs to manage every variety of VC

It was my first company and things were bad as bad can be. The dot-com bubble burst. We were sued by former co-founders. We had to slim down the company from 140 people to 40. We also had to recap, where one of our key investors wrote his investment down to zero and walked away. In the land of venture capital, that’s not a divorce. It’s an annulment, a complete disavowal – the venture capitalist’s way of saying, “This never happened.” There was a gossip rag called Fucked Company which took great glee in trolling us online.

I took it all very personally. 

As has happened many times throughout my career, I turned to my mentor and investor, Arthur Patterson. The world was on fire all around us but Arthur seemed unfazed. “Arthur,” I said, “you seem remarkably calm given the situation we find ourselves in. Why aren’t you freaking out?” 

“Hmm,” he replied. “Would that do anybody any good?” 

Years later, we landed an exit with a 6X return – not a supernova, but better than a stick in the eye. I always knew there were different brands of VC’s – Arthur being in a league all his own – but this was the moment I began to understand that two key characteristics of VCs hugely determine what an entrepreneur’s life looks like in both the booms and the busts.

If you have a talented VC who is a huge value-add in a bull market, that doesn’t necessarily mean they have the psychology to survive in a bear market. And if you have a VC who stays calm, cool and collected, you should appreciate them always, but if they don’t understand your market, your customers, or what your technology does – well, that’s less than perfect, too. The difference comes down to Skill vs. Chill.

Chill and Skill can together be understood as a natural result of the Lindy Effect. The essential idea behind the Lindy Effect, particularly as it applies to startups, is that the longer a company has the chance to learn and iterate and improve, the longer it’s likely to continue existing. This sounds self-referential and circular, but it belies a deeper truth: If you persist, the market you’re pursuing actually exists, and you’re willing to iterate like a demon to find it – eventually, you will. 

What’s required from the entrepreneur to harness the Lindy Effect is subject for a different post. What concerns us here is how it plays out for the VC. The necessary condition for a great VC is Skill: the wisdom to discern that the company they’ve backed actually ought to exist and is led by Founders with the scar tissue and the clock speed to bring it to life. The sufficient condition is Chill: Great VC’s who play the early-stage game well understand it requires patience and the recognition that startups tend to succeed with a bit of luck and grit – until they eventually get lucky. 

Armed with this understanding, as the entrepreneur, you can make more thoughtful decisions about who to take money from and who gets a board seat. Just as importantly, you can better evaluate and navigate with the board you have. 

Let’s get into it:

🥋⚔️JEDIS⚔️🥋

(High skill, high chill) 

📝Definition📝

These are your ride-or-die homies, the true pros of venture capital. They add insight and informed intuition in any market, and they keep their cool when your company starts to fly apart, as it inevitably will. Importantly, they advocate for you with their partners. More seasoned Jedis have the influence and the acumen in their own firms to maintain an institutional commitment to your company through all the bumps. 

💼How to Deal💼

Juice them for wisdom and invest deeply in the relationship. You need to enroll your Jedi in your plan and set them up to help shepherd other board members and investors for you. They’ll lead your Friendlies, calm your Neurotics, and either tranq-gun your Destroyers or help you show them the door. If you’re smart, you’ll recognize that your central task is to learn everything you possibly can from them and to listen to everything they say, even if you don’t understand it fully the first or second time they say it.

🤗 FRIENDLIES 🤗

(Low skill, high chill)

📝Definition📝 

These are the VC’s who know what they don’t know and steadily support the cause, usually following a Jedi. They’re friendly, and their money is green. In a great market, they might not be the biggest value-add in terms of expertise, but they bring their checks to the table and don’t consume all the oxygen in the room. When shit hits the fan, their more moderated psychology allows them to channel their inner Arthur and recognize that freaking out only sheds heat, not light.

💼How to Deal💼 

Keep ‘em happy. Tell them what they said at the board meeting was brilliant and should probably be adapted into a TedTalk immediately. Remember: your friendlies are not necessarily equipped to help you get out of the ditches you’ll find yourselves in throughout a build, BUT they won’t deepen the ditch by needlessly spinning their wheels – and that’s worth plenty. 

💣 DESTROYERS 💣

(Low skill, low chill) 

📝Definition📝

If you started your company in a bull market, it’s easy to think you’re inviting a Friendly on to the board only to find out that they’re a Destroyer in disguise. Perhaps they never had a great depth of knowledge but their money was still as green as everybody else’s. It’s not until a tough market that you see these VCs for what they are: an existential threat. 

💼How to Deal💼

As Vinod Khosla has observed, not only do others in his profession fail to accrete, they also frequently delete value. There can be no question that low-skill, low-chill VC’s have destroyed hundreds of viable companies in Silicon Valley during the last 20+ years. When their hubris, certainty, and oblivion get mixed with a dose of hard times and panic, the reverberations for the companies they’ve invested in can be severe. You should handle this cohort as you would defuse a live bomb – thoughtfully, carefully, and with full awareness that if not dealt with properly, their unraveling will likely also entail yours. Once you know you’ve got a Destroyer on your hands, your job is to usher them gracefully off your board.

A threat like this requires a hostage negotiator. Enlist your Jedi to take this one step at a time as you figure out a strategic plan to eliminate the ticking time bomb. 

😖 NEUROTICS 😖

(High skill, low chill) 

📝Definition📝

Neurotics know useful things and they’ll be all value-add when the going is good. But when boom goes to bust, knowledge can be a dangerous thing. Neurotics aren’t always identifiable until shit gets real – which can make them feel a little Jekyll and Hyde. Their skill will make them want to contribute, but their lack of Chill can easily lead to panicked thinking, brain-dead recommendations, and five-alarm freakouts with the rest of the board and management team. 

💼How to Deal💼

Leverage the influence of your other board members to bring Neurotics back into the fold. Nobody wants to be the VC that shat the bed when the going got tough – and no one wants that VC to have a board seat. Appeal to the well-adjusted operator who could still be in there beneath the cloud of panic. 

Try to break through the noise and hold their hand through turbulent waters. But if they can’t self-regulate, it’s on you, as CEO, to run the Destroyer play. 

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