Today I want to explore the strong preference for entrepreneurs to seek investors who have started companies themselves. There is no doubt that starting a company is one of the hardest undertakings a human being can pursue, and it is more likely that a former entrepreneur can empathize with another entrepreneur when the going gets tough. It's also more likely that she can provide useful advice on scaling a business because she has undergone that process herself. Investors who have never started companies may lack that knowledge, and as Vinod Khosla recently said "those who can't do, invest".
So this heuristic about getting founder funders on board came about for good reason, especially in Asia where many "vc's" come from later stage PE or IB backgrounds where the relationship between investor and operator can be more contentious (see prior blog post here). These folks can contribute zero value and add lots of pressure to perform. But like all rules, this one is made to be broken.
A friend of mine once stated the rule as such. "You shouldn’t listen to anybody who wasn’t a founder. Only founders understand founders". This is really a shortcut to try and answer the real question.. "who are the right partners to help my startup become a billion dollar company?"
This of course depends on what kind of company you've started and where the weaknesses are in your team. Let's say your company is focused on the retail sector, and the Chief Information Officer of the GAP wants to help you out, you should listen to him even if he's never started a company. If you've started a bitcoin company and an investor has particularly close relations with regulators, then he's probably worth listening to even if he's never started a company. Most people would think it a bit odd if a founder decided not to take money or advice from Jim Breyer, the top ranked VC in the world last year and instead took advice or money from the founder of a moderately successful internet company. (Not to knock founders of moderately successful internet companies... I'd consider myself part of that category).
In fact, 6 out of 10 of the top VC's in the world (according to Forbes Midas List) have never started a company! So a note to founders... seek investors and advisors who can help you grow your business. Often they will have been founders, but not always.