Recruiting a new investment professional into a venture capital partnership is no easy feat. The experience is fraught with mistakes at every turn, from defining the “spec” to initiating the search, interviewing, referencing and ultimately “gelling” with a new partner.
Limited partners typically focus on the final outcome, that of team stability, but seldom focus on the recruiting process itself, leaving much to chance as even currently “stable” partnerships face the threat of turnover and the eventual challenge of recruitment. Due to both turnover and organic growth, a firm’s ability to effectively recruit new partners becomes as important as the quality and success of its current investment professionals.
We should know. We made recruiting errors of our own in years past. Certainly the ubiquitous bubble caused some of those errors, but others could have been avoided. Having learned our lessons the hard way, we are now optimistic about the recruiting process. We will find out soon enough. We are actively engaged in the recruiting process for a new investment partner and have put together an action plan for the process. We share it with you in the hope of returning here months later to see whether our implementation plan panned out.
For our partnership, the high-level “spec” is easy to define. We are looking for an “accretive” partner; someone who can bring to the partnership a quality it does not already have. A partner’s accretive power is relative. That certain something may include an impressive deal sheet, extensive limited partner relationships, deal flow, or reputation.
In our case, we do not value “vertical” industry experience (i.e. semiconductors or software) highly. In other words, we are looking for an IT generalist, not a specialist. But many firms do focus on specialty. Our philosophy is different: in a small partnership, generalists are more accretive by virtue of their ability to change with the times. Many firms, ours included, made a mistake by recruiting deep domain specialists. For example, an investor with deep optical experience was a hot commodity when optical investments were all the rage. But now, in the post Internet Bubble environment, few specialists are able to move beyond their areas of expertise.
Sourcing candidates is the next step in the process. In an ideal world, a pre-existing relationship is the best way to source candidates. Often however, a recruiting discussion is a difficult one to initiate, even between the best of friends. An intermediary is often needed. Hence, enter the executive search firms. For executive search firms (and their clients), a GP search is one of the most complex and trying projects to undertake. One Silicon Valley executive recruiter continually swears to stop doing GP searches, which appear endless, thankless and payless (relative to the time required).
For example, one major Sand Hill Road firm has continued its executive recruiter-driven GP search that began almost two years ago. Not all searches take that long. Typically, the search duration and frustration is a function of the size of the existing partnership. This follows an N! (N-factorial) equation correlated with the number of current partners. As one GP in a eight-person GP group recently noted, “It’s impossible for us to arrive at any unanimous decision, much less one regarding a new partner…we’ll need to see a lot of people to agree on one.”
Smaller partnerships have a less difficult challenge and for them the ability to more easily come to unanimous consent provides a hiring advantage.
Experience, Hunger or Capability?
Once the accretive power is defined and candidates are sourced, the next challenge becomes selection. What does the firm seek in the DNA of a new partner?
After considerable deliberation, we developed our criteria for defining the intersection of experience and hunger and capability (See figure, page TKTKT). These are intuitive choices and seem obvious. After all, what VC is not experienced, capable or passionate about the work? As it turns out, many.
Experience is in the eyes of the beholder. During the Internet Bubble, operating experience was all the rage for the growing ranks of venture firms. CEOs, former CEOs, and high-power executives were the panacea. But when the dust settled, it turned out that venture investing experience was the most important qualification for the profession. Today, only investment deal sheets matter. As an early-stage firm, we focus on understanding whether the deal sheet provides a stage match, not just an IRR match. So do your due diligence before your LPs do it for you. Understand attribution and the role of a GP candidate in every deal on his or her deal sheet.
Hunger is a more difficult criterion to measure. Often it correlates inversely to venture experience, especially for those whose deal sheet is “top quartile.” The problem is that nobody likes to admit they are less motivated than before, But those experienced VCs looking for new platforms are often doing so because their old homes have become too taxing in proportion to their new wealth.
Egos and confidentiality agreements prevent anybody from acknowledging this problem, so GPs with impressive deal sheets must be most carefully scrutinized to determine hunger. For a newer group like ours, hunger is not only a critical requirement, but also a key ingredient to the subsequent chemistry fit. Partners without similar financial objectives are unlikely to find harmony in building a business. Hunger is often, but not always inversely correlated to wealth. The key things to look for are hobbies, number of homes, vacation expectations, and workday expectations. There was a time when these topics were considered too “personal” for early dialogue. Today, they are front and center.
In the venture world, a person pitching their second home in Montana to Architectural Digest is less likely to be 24/7 managing a venture portfolio.
Finally, there is capability. This requires a good understanding of whether experience and hunger can translate into continued success. This criterion seems extraneous, but isn’t. Prior experience and determined hunger may still fail to produce future results. Because of the person’s prior platform, perhaps deal flow or previous relationships came from others and the person’s ability to effectively network and market him or herself has yet to be tested. Perhaps, again because of prior roles, the person is unable to be an effective fund-raiser or firm marketer.
At many firms, some partners are shielded from the firm’s LPs. This gives these professionals a chance to hone their deal sheets without the overhead of managing LP relationships or back-office operations. For a younger firm, those relationships are key. An experienced and hungry manager may not have the capability (or desire) to work in a firm where LP and back-office responsibility is required of each team member. This type of capability is as much a requirement for a younger firm as is an impressive deal sheet.
Referencing is both an art and a science. Most GPs feel at ease with the process, common as it is for recruiting operating executives. GP referencing is a lot more complex and should be a lot more exhaustive (as well as exhausting).
A bad CEO hire is reversible; a bad partner hire is much more “expensive” to undo. As with other references, the key is to depart from the official reference list to find candid and mutual feedback. At Blueprint, we put in place a contact exchange process, whereby we trade our entire list of contact names with a prospective candidate and ask them to do the same. This allows us to find mutual acquaintances who may not have been originally offered as references. With each person’s consent, we can then make some additional calls. In addition, considering the importance of contacts and relationships in the venture business, this enables us to see at a quick glance how wide or deep somebody’s relationships are, rather than how the candidate perceives them.
Venus or Mars?
To better understand the chemistry and alignment with partners, some years ago our firm started an annual offsite meeting, which includes an exercise in personality mapping and testing. This has been an enlightening exercise. By mapping each of our work styles according to dominance, intuition, steadiness, and conscientiousness (similar tests like Myers Briggs also exist), we have come to better understand our strengths, weaknesses, and areas of synergy. With profile in hand, we have identified styles that are either important or missing from our group. From technical skills to detail orientation, these are the types of Venus and Mars perspectives that risk breaking a partnership apart.
By better understanding ourselves, we have learned how better to accept and integrate a new team member. This exercise has been the single most important step in recruiting a new partner.
Once a person has been identified, the difficult question of compensation begins. With a carry-weighted model like ours, that conversation provides even better insight into motivation and hunger. A carry-weighted compensation model does not provide wealth creation via current compensation from management fees. Instead, as with company managers, it focuses venture managers on the upside of the portfolio.
Those focused on million-dollar current compensation are unlikely to focus as heavily on creating value through their portfolio. This compensation model whittles down candidates who feel adequately rewarded by cash, but are truly motivated by the portfolio itself.
When all is said and done, a partnership is not a job, it’s a marriage. Just like in marriage, an engagement period helps everyone gauge whether the union might be one that’s made in heaven.
Ideally, a trial period of between three and six months can be used to really understand whether chemistries can gel. Of course problems might surface later, but generally one knows in the first 90 days whether the match is blissful.
During this period, hunger and capability (or lack thereof) can be seen regardless of how much due diligence was done beforehand.
There are several steps venture firms (and GP candidates) can make to increase the probability of a great fit leading to long-term stability. While there are never any guarantees, thought and due diligence can go a long way towards helping ensure a lasting marriage.
Bart Schachter and George Hoyem are managing partners with Blueprint Ventures. Blueprint is an early- stage venture firm with two funds under management. Schachter focuses on communications and IT infrastructure, wireless technologies, nanoelectronics, software, and communications semiconductors. Bart may be reached at