THE BLOG
03/14/2013 03:35 pm ET Updated May 14, 2013

Fighters vs. Arms Dealers

One entrepreneur I met said, "You don't want to be in the army, you want to be an arms dealer." By this he meant that you wanted to build a business that didn't rely upon someone winning or losing, but that would benefit from supplying both sides (e.g., a component manufacturer like Qualcomm that sells to all smartphones, as opposed to a smartphone manufacturer that has to duke it out with others).

The quote sounded smart, but I've concluded that if we all follow his advice we're sunk.

One reason the finance business is always busy is that it functions much like the arms dealer. You don't need to figure out precisely who's going to win or lose. You wait until someone gets to a certain point and then you help them access capital in the form of equity or debt, give them a credit line, etc. And if a company goes down you're there to assist with reorganizations, divestitures, bankruptcies, etc.

Yet the real value is being created by the fighters that are forming little squads and cobbling together businesses. Some fail, some succeed. If they succeed, they wind up building an army that's accomplishing something (providing new software, better services, tastier food, etc.). They also form the character of the people in the army who believe in what they're doing.

I meet young people all the time who say something like, "I want to work in venture capital." And I can see why. Who wouldn't want to be smart, well-paid, dispense large sums of money and tell people what to do? I remember looking up to most any venture capitalist as someone who could make my little company happen with a single million-dollar check.

But if you were to present a choice between making investors super-capable and entrepreneurs average or the reverse, I'd choose super-capable entrepreneurs all of the time. Even experienced venture capitalists are making highly speculative bets and expect a failure rate of up to 80%, with their winners hopefully being explosive enough to provide returns on all of their investments. If they get one Twitter or Facebook, no one remembers the other ones. It's one reason why venture capitalists are primarily interested in businesses that can scale, and why investors like 500 Startups that invest by stage and algorithm can be as successful as investors that are carefully selecting a few investments (like an ETF versus an actively-managed mutual fund). Meanwhile, the entrepreneurs have to solve thousands of mini-problems on their way to solving the big problem.

I like most of the venture capitalists I know; they're smart, well-intended guys who genuinely enjoy helping entrepreneurs succeed. And I love venture capital and investment capital of all categories -- its economic impact is proven. The more of it the better.

But which would you rather have, better arms dealers or better fighters? And which do you want to be? At least for me, I always dreamed about going in the woods and killing the dragon, not selling the guy the sword.

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