So far in our ongoing review of lessons learned during the tech bubble, we reviewed a number of financing, structuring, hiring and other guidelines that eluded us over the last few years. We discussed the investment pyramid, which guides us to manage our cash infusions frugally from the very first check and to follow only our winners over time. We talked about the exit constraint on venture-backed companies and how only capital-efficient companies can exit profitably in the environment ahead. We discussed the role and importance of CEO selection in early-stage projects. We discussed syndication and the importance of goal congruence with syndicate partners. We also talked about VC time management in early-stage projects (five to six boards per person), the venture role of coach vs. manager, relationship building on venture-backed boards, and how capital efficiency plays into the building of successful and lasting companies.
When looking back across the many lessons learned, a pattern of conservancy emerges. Many of us got carried away, first in backing too many companies, then in giving each too much money and then, in many cases, going back to the LP well too often or for too much. For each company we backed, we were too eager to start spending as soon as possible, or at least until the well went dry.
This month we examine the lessons learned in building a venture team during the headiest of times. Of course, as with any emerging manager firm, we are particularly cognizant of errors made in building our firm, but the mistakes were not ours alone. Creating and recruiting into a partnership is a challenging task and one never made simpler by successful team building in larger corporate organizations. Venture partnerships are fickle and sensitive organizations that require a multi-step program to smooth success. The last few years have shown that even the most stable partnerships are subject to the tumultuous changes of the industry. As a small exercise, we leave it to the reader to compare team rosters on the venture firms of their choice, using a handy Web site called www.archive.org. Here you can enter the venture firm of your choice and “roll back the clock” to the team roster of years past. Meanwhile, we will do our best to share our lessons for building a venture partnership.
Experience shows that alignment between partners in a firm is a critical requirement to a successful team dynamic. Unfortunately, this is easier said than done. Partners cannot simply align behind an objective, as they do in a corporation. “Grow Market Share” is not a suitable imperative for a group of venture capitalists. Aligning behind a lifestyle is much more critically important, especially for successful venture candidates who have enjoyed professional and financial success. The challenge then becomes understanding whether the lifestyle alignment between partners is genuine and could lead to a long-term relationship.
The obvious places to start are age and net worth. As we learned the hard way, alignment is rarely easy with people far apart in age. Age and life-timing are important. Some limited partners focus on specific ranges they find suitable for both. At a recent conference, a prominent LP expressed an interest in backing newer venture capitalists in their late 30s. The same person said they want to make sure the partners had some net-worth, but anything north of $5 million was deemed suspicious. These numbers are less important than the relative ages and net-worth of the team. It is hard to imagine (and, from personal experience even harder to instill) a sense of common purpose in a group where one GP is 40 and another is 70. There is no substitute for life timing and common purpose where the age gap is so large.
The same goes for net-worth. A venture group cannot have a healthy dynamic when some of the partners are worth hundreds of millions and yet others mere millions. Of course, there are exceptions to every rule and there are plenty of heca-millionaire VCs who drive just as hard as they did 10 years ago. But it would be foolish to assume it. Again, the success-focus is less on absolute worth than on relative one. The important point is that the likelihood of long-term partnership stability is greatly enhanced if the partners’ bank accounts all have a similar number of zeros, whether it is only a few or many
Fire in the Belly
A lot of LPs talk about the “hunger factor” in determining GP success. For GPs courting other GPs, this is a very difficult test. Of course the easiest test is one of age and net-worth. It is easy to assume that a relatively young person with a relatively modest net-worth would be willing to work very hard to achieve success. We would hold that to be generally true and safe.
But what about recruiting more experienced (and wealthier) talent to a venture firm? A well-known executive who became a venture capitalist several years ago was asked by the Wall Street Journal about the impetus behind his career change. His response, “My wife thought I was working too much.” Indeed, the broad generalization that inversely couples hunger with net-worth is probably the best determinant of hunger in venture capital. As before, the hunger factor, and its determinant on team success, is more important in relative than absolute terms. Experience shows that partnerships break up when some of the partners are more highly motivated than the others to “keep going.” Testing (correctly) for hunger is an important step as GPs team up. Many of us incorrectly tested for hunger during the last few years.
What makes the perfect venture capital background? As it turns out, it’s, well, venture capital! During the bubble, many GPs flocked to operating executives whose transition and value to startup ventures was undeniable. Early during our first fund we set out to recruit an additional partner and put this question to about one dozen of our limited partners. The answer was, unequivocally, operating experience was all that mattered in recruiting talent. The queue of CEOs lining up behind venture capital entrance doors was long enough to slow traffic on a five-lane freeway. Now, with a moment of respite behind us, it turns out that most (though certainly not all) of those operating executives were incorrectly suited for the venture business. Why? Several reasons. One is the “screwdriver syndrome.” Many operating executives, who are used to managing small and large organizations, couldn’t let go of their screwdrivers when managing their portfolio companies. Their predilection toward “fixing things” rather than coaching management led to gargantuan battles in the board room. More importantly, many operating executives found themselves unable to deal with challenging (and non-hierarchical) partnership dynamics. They were unable to easily “fit” within the flat partnership structure of many venture firms, much less “report into” the de facto managing partners of these firms. The most senior of operating executives failed to understand that venture capital was a new career that took them back to the bottom rung again, no matter how high they climbed in operating roles.
Many newer venture capitalists, arriving to their firms fresh from operating, banking or consulting roles looked around to understand how they would get the job done. They thought back to their marketing, finance or engineering teams, or their consultants or departments, and wondered who would do the research, who would build the investment recommendation, who would do the due diligence, who would go to the conferences, who would fill out the company information for limited partners, and who would present the firm’s strategy to the outside world. And their partners looked at each other and the newer VCs saw something they didn’t like: Venture is an individual contributor role that goes against everything a successful manager has ever learned to do: leverage others. Many high-level executives joining venture ranks found themselves sitting in front of a PC or copy machine with the same amazement that George Bush once professed upon seeing a supermarket checkout scanner. When recruiting operating executives, many of us forgot to test for this part of the job description.
Getting Your Hands Dirty
Many VCs are attracted to their profession for its lifestyle promise and because the job sounds easy: You show up at a bunch of board meetings and shoot down management ideas. You get back to your office and you shoot down some would-be entrepreneurs. You improve your golf game and build a new house in Montana. You ski. Alas, many who view the business in this way are severely disappointed by reality. Expectation-setting is extremely important. Many LPs feel the key to partnership peace is decision-making. As the argument goes, a formal and organized fashion for selecting deals and investments leads to partnership tranquility. Many LPs will test out the decision process when evaluating their partnership investments.
In our opinion, that is not where things break down. Things break down when (some) partners fail to understand that, like all businesses, a venture capital firm requires a lot of behind-the-scenes work. Swinging by the office for partnership meetings in between board meetings may be sufficient for some older partnerships but not for newer ones. The key to tranquility is equitably splitting the real work: managing investor communications, LP relations, fund-raising, marketing, quarterly reports, Web site design, managing funds, etc. Ensuring that every partner correctly meets the expectations of others regarding these critical back-office functions is important to team stability. Venture capital, after all, is not all fun and games.
Bart Schachter and George Hoyem are managing partners with Blueprint Ventures. They focus on software, communications and IT infrastructure, wireless technologies, and each has other particular interests, such as nanotech. Email Bart at firstname.lastname@example.org and George at email@example.com.