“We wanted flying cars, instead we got 140 characters.” – Peter Thiel

Few quotes capture the essence of Venture Capital better. A former PayPal co-Founder and one of the most successful Investors of his time, Peter Thiel has made a name for himself with his contrarian opinions. Writing the first Facebook check, making early investments in unicorn startups such as Palantir, and co-founding the elite VC firm Founders Fund made him a reference among his peers. While many Investors boast about their risk-taking abilities, Thiel’s quote highlights how the majority of VCs focus, as I often say, on capital rather than venture. Instead of funding moonshot projects like flying cars or space travel, most VC investments tend to be shorter-term, safer bets on companies such as social media giant Twitter (who famously increased their character limit to 280 in 2018).

In this post, I analyze how Venture Capitalists have changed over the last few decades, describe the two different types of VCs using the promotion vs. prevention framework, and explain how you can quickly identify them if you want to succeed in a Venture Capital career or raise VC money.

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In This Article

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The Days of Yore: When VCs Helped Built Extraordinary Companies

Most people, and certainly a majority of startup Founders, don’t realize that Venture Capital is not about taking bold initiatives that will radically change humanity’s future. At least not anymore. Hall of Fame Venture Capitalists such as Arthur Rock, Eugene Kleiner, Tom Perkins, and Don Valentine had a different approach than most VCs today.

Case Study: Genentech

The textbook case is Genentech, a biotech company founded in 1976 and generally considered one of the inventors of modern biotechnology. Genentech was co-founded by Herbert Boyer, a genius scientist and UCSF professor, and Robert Swanson, a Venture Capitalist. Swanson was one of the first hires at the 1972-founded Kleiner Perkins (KP), one of the most prestigious firms in Silicon Valley today.

Although he was an Investor by training (with a background in chemistry from MIT), Swanson didn’t act as the lead Investor in Genentech. He had been asked to leave Kleiner Perkins in late 1975 but was allowed to linger on and started meeting key science figures in the Bay Area. He launched Genentech as a co-founder with Boyer, who, according to Silicon Valley lore, initially agreed to meet Swanson for a ten-minute walk.

The lead Genentech investor was Tom Perkins, who chaired its Board for almost two decades, helping with crucial aspects of its trajectory such as the business model and innovative financial engineering.

My involvement in Genentech taught me nothing about DNA, but I learned an awful lot about financing.

David Packard

Packard, who had been Perkins’s boss at HP, had been asked to join the Genentech Board and marveled at Perkins’s financial savviness. Two VCs helped Genentech become a giant in its industry: one, Robert Swanson, co-founded it; the other, Tom Perkins, steered its Board.

In 1980, Genentech went public at a $300 million valuation, making it one of the biggest winners in VC at the time. In 2009, the company was acquired for $47 billion by the Swiss-based healthcare company Roche. The KP-Genentech story is emblematic of how VC used to create or transform industries and even features as a Harvard Business School case study.

Something Ventured

Most Venture Capitalists through the 1990s had a hands-on approach to building companies. The 2011 movie Something Ventured features some of these larger-than-life pioneers, many of whom have passed away.

“Something Ventured” offers an insightful look into the world of Venture Capital and its impact on the tech industry. The film interviews notable Venture Capitalists who discuss their investments in companies like Apple, Intel, and Cisco. These VCs took risks on unproven startups that would go on to revolutionize entire industries. By providing funding and guidance to these entrepreneurs, they helped shape the technology landscape we know today.

The documentary also delves into the risks involved in VC investing and how VC has become a critical part of the US economy. It is a must-watch for anyone interested in the history of Silicon Valley and the role of Venture Capital in shaping its success.

How Do the 1950s-1990s VCs Compare To Today’s Batch?

Another critical change of the last decades is the background of even the most successful Venture Capitalists. Many legendary VCs of the former era came with operational experience:

• Eugène Kleiner, the co-Founder of Kleiner Perkins, worked as an engineer at Western Electric and then famously co-founded Fairchild Semiconductor, an illustrious name in the history of Silicon Valley
• Tom Perkins, the co-Founder of Kleiner Perkins, was an engineer at Hewlett-Packard
• Don Valentine, the Founder of Sequoia Capital, started his career in sales and marketing at Raytheon and then moved to Fairchild Semiconductor
• Bill Draper, the co-Founder of Draper and Johnson, worked at the US Export-Import Bank and then served as the first head of the United Nations Development Programme
• Franklin Pitcher “Pitch” Johnson, the other co-Founder of Draper and Johnson, worked in the aircraft industry

These famous Venture Capitalists had diverse backgrounds before entering the world of Venture Capital, bringing unique perspectives and experiences to their portfolio companies. Despite notable exceptions (Reid Dennis of IVP and Arthur Rock), they all worked in operational roles at large companies before their VC career.

Venture Capital has long moved away from its earlier model. As the asset class matured and more money flocked into startup investments, the profile of the typical Venture Capitalist changed. Most Investors these days are glorified money managers making (risky) bets on behalf of their Limited Partners and not bringing much value to the entrepreneurs they back.

It is why some players such as Tiger Global have been so successful, for a while, at offering Founders money at attractive terms and minimal or no Board supervision. While crossover funds lost their shine in the 2022 VC market reset, they highlighted a segment of successful startup Founders who did not estimate VC’s value-add was worth much.

I’m not one to invoke the “It was better before” mantra, which reeks of nostalgia bias. I’m confident that all VCs from earlier eras were not flamboyant capitalist adventurers à la Don Valentine and Tom Perkins. There’s survivorship bias at play here.

I will take a bet, though, that most of today’s practitioners (except legends such as Bill Gurley, Fred Wilson, Mike Moritz, and others, who are all close to retirement or already retired from active roles) don’t “map” to former-era VCs, as Social Capital’s Chamath Palihapitiya put it. I believe it is due to a change in the Venture Capital trade, which left us with two types of VCs.

There Are Two Major Types of Venture Capitalists

What comes next took me 12 years and two jobs at investment funds to understand. I’m sure others have talked about it, and if so, I wish I had read about it before. Understanding the topology of these two types of VCs will help LPs better select the firms they invest in, aspiring VCs look for a job at the right fund, and fundraising Founders target the right type to get their process moving.

Herd Investors vs. Maverick Investors

I want to clarify that this categorization is not meant as a value judgment. Many successful Investors have the herd mentality, and many of my dear VC friends belong to that category.

1. “Maverick Investors” independently conduct top-down analyses of industries and in-depth bottom-up evaluations of specific investment opportunities to arrive at an investment decision
2. “Herd Investors” are more concerned about joining the bandwagon when the train is leaving the station, typically spend less time doing data-driven analysis, and devote more resources to gathering market hearsay

When I initially wrote this post some time ago, I added: “Note to self: come up with a better name.” I have since conducted more research and now use E. Tory Higgins’s regulatory focus theory to frame this divide. The new nomenclatures, promotion-focused and prevention-focused VCs, sound less judgmental.

Here’s a list of posts diving deeper into this fundamental categorization of Investors.

How Did We Get Here?

How Venture Capital is structured disincentivizes many VCs from taking risks and making the long-term bets that moonshot investments require. As more professionals entered the market, the middle-of-the-road approach thrived amidst groupthink and a herd mentality. One of the best descriptions of this phenomenon comes from Y Combinator’s Paul Graham.

By far the biggest influence on investors’ opinions of a startup is the opinion of other investors. There are very, very few who simply decide for themselves. Any startup founder can tell you the most common question they hear from investors is not about the founders or the product, but “who else is investing?”

Paul Graham (Source: his awesome blog)

I dug deeper into the origins of VC herd mentality in two posts, including this one—starting from a quote by Graham’s co-Founder at Y Combinator, Jessica Livingston.

This tendency has far-reaching consequences for Limited Partners backing VC teams in the hope of glorious returns, aspiring VCs looking for a VC career, and startup Founders raising funds from financial Investors.

Why You Need To Know Which VC Type You’re Talking To

Knowing which group an individual Investor belongs to will help LPs, Aspiring VCs, and Founders make an informed decision.

Limited Partners hoping to invest their money in the best teams want to ascertain that they are getting alpha for the fees and carried interest they pay out. Contrary to common belief, the best Investors don’t play it safe. Those consistently making top-quartile returns across several funds have a marked risk appetite. To take a baseball analogy, they focus on slugging percentage, not batting average.

Aspiring VCs need to know what kind of VC firms they apply to for at least two reasons:

• The skills required to be successful on the job are different, one type primarily focusing on data-driven analysis and the other on networking
• It helps to join a firm with a similar culture: being an independent thinker in an environment where you constantly need to resort to external validation—rather than your in-depth analysis—to push deal opportunities through investment committees will prove mentally exhausting in the long term

Founders raising VC money also need to know if the Investors they engage are of the Maverick or Herd qualify. As I highlight in my webinar “3 Effective Methods To Contact Investors“, it is far better to convince a Promotion-Focused VC to commit to leading the round before going to Prevention-Focused VCs.

How Can You Tell Maverick VCs Like Peter Thiel From Herd Ones?

Investors willing to fund flying cars rather than social media companies are few and far between. One aspect they often share is that they manage their own money—at least to some extent, which means they have been successful at the VC game—and are not afraid to speak their mind.

Thiel’s firm, Founders Funds, exemplifies this principle well. In a famous manifesto called “What happened to the future” they published on their website, Founders Fund describes their most important principles and ideas, including:

• The team is the largest Investor in their funds, contrary to the industry convention of 1% (Thield is said to have had a 20% stake initially)
• The investment focus is on truly transformative ideas, not “features, widgets, irrelevances”
• Investors must accept taking a technological risk, not just a market risk

The common thread between VCs such as Peter Thiel, Vinod Khosla, Steve Jurvetson, and Tim Draper, to name a few, is developing a vision and then dedicating time and money to test it. Khosla clarifies his investment strategy in this video, positioning him as a pure promotion-focused Venture Capitalist.

The discipline required is enormous and may make them miss some hot deals, but long-term returns are often much better. As it turns out, you can take the long-term view and make much money. A typical trait of promotion-focused VCs is their “What Can Go Right” attitude. It’s not without risks, but this type of Investor is ok with losing it all as long as there’s a reasonable probability of making it big. I’ve shown in my webinar Do VCs Take Enough Risks? that elite VC partners focus their time and energy on startups that are often not obvious to other people.

This promotion vs. prevention focus research, inherited from E. Tory Higgins’s regulatory focus theory and applied to Venture Capital, is a work in progress. Make sure you sign up for my newsletter to receive notifications of new posts on that topic.

Conclusion: tl;dr

We have Twitter instead of flying cars because Venture Capitalists today are more focused on short-term gains than their predecessors. The traditional Venture Capital model has shifted from a long-term investment strategy where it was common to co-build companies alongside its Founders, to one that prioritizes immediate results and quick returns. This shift has led to focusing on consumer-focused startups in areas such as social media, apps, and e-commerce rather than groundbreaking technological innovations.

VC funds’ Limited Partners, Aspiring VCs, and fundraising Founders need to understand the differences between the two types of VCs, Maverick and Herd (or Promotion- and Prevention-Focused, to use better terminology and theory). By recognizing these differences, they can better navigate the Venture Capital landscape and achieve their goals.

This isn’t to say that all modern-day VCs lack foresight or focus solely on short-term gains. Many investors still prioritize innovation and are willing to invest in cutting-edge technologies with longer development cycles. However, there has been a shift away from this approach in recent years, which has impacted the type of companies receiving funding. Innovations such as Tesla, SpaceX, and ChatGPT still get funded, but they are the exceptions rather than the norm.

It will be interesting to see if there is a resurgence of interest in long-term investments as the world faces increasingly complex challenges that require innovative solutions. Perhaps the next generation of Venture Capitalists will prioritize bold ideas over quick wins again, leading us closer to the flying cars we’ve always dreamed of—even though Elon Musk doesn’t think it’s a good idea.