Recruiting Secrets for Venture Capitalists –

There is no denying that the life of a venture capitalist is fast paced, and it seems there is no slowdown in sight. According to a 1980 Harvard Business School report, the average venture capital fund had assets of $20 million at that time. What this meant was that usually two or three general partners each managed three to five investments, which left a lot of time for the partners to work directly with their portfolio companies. At the beginning of the new century, the average fund is now 10 times larger, and each partner has two to five times as much responsibility. Not surprisingly, a vicious circle has developed around the VC industry.

In today’s market, the image of a VC who works hand-in-hand with entrepreneurs is simply not true. Reality demonstrates that the financial incentive for partners at VC firms is to manage as much money as possible. More money to manage means less time to nurture and advise entrepreneurs.

As an example, if we assume that each partner has a typical portfolio of 10 companies and works a 2,000-hour year, the total time spent with portfolio companies is 40% – serving as directors and acting as consultants – then partners spend 800 hours per year in that capacity. That allows only 80 hours per year per company – less than two hours per week. Add in the shaky U.S. economy and a massive talent shortage, the time spent with your portfolio companies is even more valuable. Is two hours a week enough to guarantee a successful investment?

A Most Important Duty: Recruiting Senior Talent

The obvious answer is no and this begs the question – how can a partner add value to their portfolio companies if they can’t find the time or the talent? Currently, in Silicon Valley alone, over 5,000 high-tech positions are vacant. A recent report by the San Jose-based, nonprofit Silicon Valley Network suggests that empty senior positions are costing companies $3 billion to $4 billion each year. These costs are associated with missed opportunity, as well as the lost productivity associated with hiring, training and recruiting.

VCs know that in order for portfolio companies to generate solid returns time is needed to recruit the best executive talent available. Recruiting a senior level executive, however, is a time consuming proposition. How can this important duty be fulfilled with all the other responsibilities? The following are some suggestions that many VC firms have employed to help with this difficult task.

Recruit the Recruiters

Though not for all VC firms, bringing a recruiter “in-house” can kill two birds with one stone. As a full-time partner, the recruiter is personally invested in making sure that the company gets the best talent in the shortest time. An in-house recruiter is always dedicated and available, allowing the firm to leverage more impact on portfolio companies by having a greater say in the hiring decisions. VC firms with an in-house recruiter stand out from competitors by offering a service to portfolio companies that few have. As talent wars continue to heat up, having an in-house recruiter is an advantage both to headhunters and VCs. Recruiters have begun to influence companies so much that some of the best sit on boards of well known companies. Most of the time the recruiters don’t have the financial expertise needed to become a pure VC; however, they do have contacts and relationships that have become nearly as important as understanding the in’s and out’s of high finance.

Some of the largest names in the executive search industry have already crossed to the other side and now see themselves as offering combined VC and recruiting services. Questions for a VC firm considering this option are: “How much influence will recruiters have in day-to-day decisions of the firm?” and “How much control will partners sacrifice for the convenience of an in-house search professional?” If your firm can make this arrangement work, the value added by a recruiter is considerable. When you need a senior level executive in a hurry, all you have to do is walk across the hall and ask your search professional to open up his vast bank of Rolodexes and start dialing.

Forming a Strategic Relationship

For the VC firm that doesn’t want to hire an in-house recruiter, the second best approach is to form a strategic relationship with an executive search firm. A search firm’s major mission is to have a bird’s-eye view of particular industries. On clients’ behalf, recruiters circle like hawks, ready to swoop down when a promising or proven executive shows an inclination to entertain new opportunities. Filling a senior position means finding the right person to fill a hole in a company’s talent pool and to have an immediate impact on the firm’s business. Headhunters are in constant contact with executives across a range of disciplines and are savvy about who’s hot, or would be willing to move for the right opportunity. A variety of services is provided by recruiters who:

* sell the job’s merits and convince the right executive to accept the right offer;

* complete all cold calling and assemble a slate of candidates for review;

* arrange interviews and act as intermediary between candidates and the potential employer;

* serve as eyes and ears of the firm for managerial talent;

* act as soundboards for both candidates and employers.

Managed properly, a relationship with an executive search firm can add immediate value to portfolio companies. A close partnership with a search firm is important because the right relationship means that the best managerial talent is just a phone call away – almost as easy as walking across the hall. The more a search professional knows about an individual firm and the attendant portfolio companies, the better equipped he or she is to complete a first-rate recruiting job.

There are two types of executive search firms – the retained search firm and the contingency search firm. Both models have their positive qualities, but a quick study of the two models must be considered to meet your particular needs. The main difference between a retained firm and a contingency firm is that a contingency firm will not charge you a dime until they find the executive that you are looking for. However, if you are like most VCs, your time is valuable. And even if you utilize a contingency firm with the best intentions you may not receive the best results. Because a contingency firm is paid strictly on placement, quality is often sacrificed. If you utilize a contingency firm, you run the risk of being overwhelmed with resumes of potentially poorly-qualified candidates. It is an approach that is similar to throwing anything against the wall to “see what sticks.”

On the positive side, a contingency firm can assist in preserving cash flow but at what cost? On the other hand, if you work with a retained firm there is a cost up front usually 30% to 35% of the first year salary of your executive. For some people this can be a pretty hard pill to swallow until you realize that it can be a very wise investment.

When working with a retained search firm, the emphasis is on completing an assignment that you have already received a fee for. Typically retained firms will find you pre-qualified executives and will present a narrow slate of four to six very interested candidates. The money spent upfront can eliminate the loss of valuable time by presenting only those candidates that fit your needs who are interested in working for your company. There is probably nothing more frustrating than working with a firm that wastes your time presenting you with unqualified semi-interested candidates in the hope that one be a good match. Since your time is valuable, you want to make sure that the executive you consider is willing and interested in the position and has the qualifications that will be mission critical to your investment.

A search firm’s size is also an important factor. Bigger is not necessarily better. When evaluating a search firm, consider the issue of “blockage,” which defines the number of companies from which talent can be drawn. A larger executive search firm is going to have many clients and, therefore, a limited number of sources to recruit from. Blockage limits the search universe and, ultimately, potential recruits.

Start an Incentive-Based Referral System

For some hot start-ups, screening and training unknown candidates may not be feasible. Instead of using a search firm, a portfolio company might set aside a portion of the company’s stock options to entice employees to refer friends and former coworkers. Although cost effective, this approach is best for hiring junior people who are more likely to fit in to the company’s culture since they already know other employees.

An employer may take the concept one step further with a “friends and family program.” This is the type of program where the portfolio company awards stock options to non-employees who assist in the process of staffing up quickly. Every time a new hire is made, the friend and the employee split a number of options, with the referring person getting the lion’s share. By using this method to attract talent, a portfolio company is in a position to move quickly when someone says, “Here are my skills and this is what I can do.”

And since the Internet bubble popped, offering equity alone is not going to be enough for someone to join small companies. That strategy must be utilized with a strong recruitment plan that involves aggressively recruiting talent. A whole range of incentives must be clearly communicated to the candidate through a strong compensation package with additional benefits.

Nothing is More Precious Than Time

Time is fleeting and, when gone, cannot be recaptured. While the recruitment of managerial talent is critically important, a lot of valuable time can be saved by outsourcing this duty to professionals, bringing a recruiter on staff, or developing a referral program. By avoiding the 200 calls necessary to land management talent, one can maintain a broader overview of the search process. If all goes well, a VC’s involvement is necessary only during the offer stage, which should free up more days to deal with more pressing issues, therefore, guaranteeing a higher rate of return for your investments.

Jonathan D’Aprile is an executive search consultant with Kenzer Corp., a leading retained executive search firm.