It's too complex and trying to use any classical or logical frameworks are inadequate. It boils down to the ability to pick "good" investments. The ability to pick the good investments typically comes after making a lot of bad investments. Like good judgment, which comes from experience, and experience comes from bad judgment. Some attributes that define good practitioners include:

§ Student of Market Trends: The foremost and primary criteria, a practitioner’s ability to understand how markets are evolving, and where investment opportunities lie is the essence of this business. Arthur Schopenhauer once wrote ‘Everyone takes the limits of his own vision for the limits of the world.’ Good practitioners are able to recognize their limits. Equally important is the ability to time the market. “The pen computing fiasco occurred in the 1990’s — it was like the iPad era, yet twenty years to early. You had a battery life of twenty minutes and a steam crank on the side” says Marc Andreessen.

§ A good judge of teams: A practitioner is a good judge of human character and entrepreneurial abilities. “We see a lot of executives who have a vision. Our job is to decide if it really is a vision or a hallucination” says Frank Caufield, Partner Emeritus, Kleiner Perkins Caufield and Byers.

§ Speed of decision making: “Having a great brand is a good start. Speed of decision-making is equally important” says Jeff Clavier of SoftTech VC. If you like the startup, you have to move quickly to seal the deal. Else someone will gladly do so. This is a highly competitive business, especially in Silicon Valley.

§ Optimism & Stability: “You have to believe that the world can change…be optimistic and at the same time, be realistic and guarded, not romantic” says Terry McGuire, co-founder, Polaris Ventures and Emeritus Chairman of National Venture Capital Association. “You've got to be a good listener. I find if the venture capitalist does all the talking, he doesn't learn very much about the people he’s thinking about investing in. Very important to listen … and judge who looks and feels like they have the makings of making a real company. Eventually it becomes instinct if you do it often enough,” says Paul “Pete” Bancroft, former CEO of Bessemer Securities, former Chairman of National Venture Capital Association. Its a combination of innate skills (optimism, judgment, comfort in ambiguity) combined with real world experience.

“Good instinct, well honed by experience makes a good venture capitalist. The most difficult part is dealing with uncertainty" -  C. Richard Kramlich, Chairman and Co-founder, New Enterprise Associates. 

§ Situational Awareness: “A lot of good venture capitalists have ‘situational awareness’ — they can walk into just about any kind of meeting and, in about five minutes, figure out who’s doing what to whom and exactly what the issues are, sort of cut through it and figure out what’s going on. You can look at a given situation and project its trajectory reasonably well” says James R. Swartz, Founder of Accel Partners. And good judgment comes with experience. “It really pays off to come into venture capital after you’ve had a fair amount of experience doing something else. I think it’s a business that you’re probably better off entering in your thirties and forties than you are entering it in your twenties, because you need to build a frame of reference by which to judge people and to judge opportunities and to be able to judge markets and what’s going on in the economy, says Reid Dennis, Founder, Institutional Venture Partners.

Christopher Rizik, a former VC who now manages Renaissance Venture Fund, a fund-of-funds says a good VC has three qualities - starting with situational awareness:

• First, have a good sense of the world around you and how it is changing. After all, we put money behind ideas that change the world — the demographic, technological — unfilled needs. You have to be open and curious to look out into the future.
• The second quality is patience — nothing will be as fast as you want. A smart practitioner never panics or gives up when companies hit a bump. Those who are patient will not only profit but will ultimately succeed at the expense of those who panic. Patience should be married with intelligence — if you can no longer achieve the end game, it takes discipline to walk away and say, we are just not going to get there. Swallow hard and realize you just lost a few million.
• Finally, the third quality is to be fair with one and all. What goes around, comes around — in the end, the best VCs are people who were fair, were smart and treated everyone well. People seldom want to work with those who are out only for themselves.

Do I need startup experience to be a VC? 

“I don’t think there is a good predictor that just because someone has an operating or entrepreneurial background that they are going to be a good venture capitalist. Conversely, if you don't, it doesn't mean you are not going to be a good venture capitalist,” Marc Andreessen, co-founder of the leading venture firm Andreessen-Horowitz said once, while speaking at a Stanford Entrepreneurship forum. The partners at Andreessen-Horowitz have deep entrepreneurial and operational experience. Having real-world entrepreneurial experience qualifies an investor to understand the challenges of any startup. It’s a necessary condition, but not a sufficient condition towards being a successful venture capitalist. “Fred Wilson of Union Square Ventures does not have an operational bone in his body — yet he is so effective in helping companies” says Bijan Sabet, a venture capitalist with Spark Capital.

The primary goal for any venture capitalist is to create value — for their entrepreneurs and their investors. “We are in the business of helping a company achieve critical path milestones. Being able to determine what is critical path is a matter of survival — our job is to be insanely rigorous about what the critical path is.”  A definitive characteristic about a venture capitalist is being analytical about these milestones, says James Bryer, Accel Partners, Former Chairman, National Venture Capital Association.

Successful venture capitalists have an entrepreneurial mindset, — the ability to understand the basics of value creation. Yet, the background of some of the leading venture capitalists demonstrates no clear pattern. You could have strong operational expertise. Or not.

Consider these two diametrically opposite views on entrepreneurial experience as a determinant of being a VC:

“I think you become a venture capitalist by being a great entrepreneur. As a successful entrepreneur, you can better figure out how to serve entrepreneurs in their mission. So those folks in the business school who figured they, like roll out of the womb born as a venture capitalist, I don’t think they’re going to be great venture capitalists. I think they should go get a job at a high technology company or a start-up. And then see if they want to step back from where the real action is into the world I work in, which is much more indirect and supporting entrepreneurs.” — John Doerr of Kleiner Perkins Caufield and Byers (KPCB)

And the contrarian, David Cowan:

“As I was finishing up my MBA, I was told, “You don’t have anything to bring to the table. The last thing a CEO wants is some snot-nosed MBA telling him how to run his business. So go get some real experience.” I had to reject the prescription and carve my own path. Operational experience is a short-term advantage. It helps a venture professional to assess and manage investment opportunities but only in their sectors of expertise.” — David Cowan of Bessemer Venture Partners 

David Cowan rejects the notion that even entrepreneurial experience is a prerequisite. “Entrepreneurs have expertise in certain domains. But in venture, domains shift all the time. And when exposed to any opportunity, those with operating expertise tend to try and fix things — that can, at times, be counterproductive,” he says. Rightfully so, several practitioners who had very strong entrepreneurial background concurred that the hardest part for them was to transition from being a player to being a coach — to let go and let someone else run their own company. They get impatient, question the pace of execution, or the direction. Entrepreneurial success for VCs, if not modulated, can translate to being a royal pain in the rear for portfolio company CEOs. Gibson Myers, emeritus partner, Mayfield Fund, supports that view, “Some people are just operating people. It’s a whole different world to go to work, make things happen. And those people don’t transition to venture capital very well, because they want to operate. In venture capital, you’re one or two steps removed from that, and you’re advising. You have a relationship. You have a bunch of companies. You can’t spend the time, so some just don’t like it for that reason, or don’t make it as a venture capitalist.”

Subject Matter Expertise: What about a PhD in Physics? 

While there is no good predictor of what makes a good venture capitalist, some patterns are obvious. Those without substantial start-up or operating experience can be successful in the profession. Yet here are some more contradictory observations — generalist versus specialist — both from very successful venture capitalists: “Back in the seventies when I started, you could be a generalist and be successful in this business. As the business has evolved over the past 50 years, it has become a lot more focused around certain sectors and now, you need to be an expert in a few areas that matter,” says Frank Caufield of Kleiner Perkins Caufield and Byers (KPCB).

While domain expertise may be a good, it certainly is not of significant importance in the long run. Your performance eventually matters. “In my 20-year career as a venture capitalist, I have invested in all kinds of domains and companies. For long-term success in this business, you have to think more generally and push yourself out of your comfort zone. You should be willing to reinvent yourself,” says David Cowan.

It's not just a few skills that matter but the ability to “adapt / grow” with the company and reinvent oneself. Promod Haque of Norwest Venture Partners echoes this sentiment:

“Being a venture capitalist requires a varying degree of skills. At a seed stage, the skills required are different from say, investments at a mid or later stage. At the seed stage, we have a founder. The venture practitioner needs to have the ability to understand risk, validate ideas, and connect these to the market. Exploration and validation are key steps at this stage. A start-up is a no-name entity — the credibility and track record of the venture practitioner can be a tremendous asset in recruiting management talent and customers. Talent that can grow the company is usually in high demand and otherwise would not be available. In the early stage, the practitioner’s ability to help the start-up to find customers is very important. The Fortune 100 companies — those marquee customers that all start-ups seek — unfortunately avoid start-ups. They are trying to minimize the number of vendors and stick with the proven ones … even if you get your foot in the door, these companies need time and ability to assess the new product. It’s a significant commitment … these are extremely busy executives and asking them to check a new product out requires strong suite of skills. As the company evolves further, the ability to syndicate the investment becomes critical. Other investors will look at how you are putting the investment rationale and leading the round”

When Seth Levine is not managing his investments at the Foundry Group, he blogs on how to teach your child to ride a bicycle. He writes:

The core of being a good VC is the ability to move from one thing to the next, often completely disconnected thing, quickly and without slowing down. Rare is the time when I sit down and spend a few hours doing something (anything) without interruption; so much so that I generally interrupt myself these days if I’m spending too much time on any one thing, but mostly because in any given day things just seem to come up constantly. With something like 8 companies that I actively work with these interruptions are all over the map — I may be helping one company sell its business, another raise capital, another plan for a strategic offsite and another with an executive search. Keeping all of this straight in my head is a bit of a task, as is shifting gears from talking about the tax considerations of a particular merger structure with one company to looking at moving into a new vertical market for another.

Seth says that a good practitioner needs to have some ADD — attention deficit disorder. In his “Attributes of a Good VC” blog, he jokes that ADD may be a necessary and a much-desirable condition to be a good venture capitalist. 

To summarize, a good VC has the ability to pick good investments and help build great companies. Yet unlike the 1970s, entrepreneurs today have plenty of choices — they can pick VCs who have the right mix of experience and empathy, those who understand their business, demonstrate a supportive mindset and can help build the companies.

This has forced VCs to up their game — each firm is trying to be "the firm of choice" and magnet for entrepreneurs.  VC firms now have operating partners, investment partners, board partners and more.

The axis is tilting in the right direction — towards the entrepreneurs. Or as Steve Jobs would say, towards the crazy ones.