Scale’s Kate Mitchell on generational transition and managing carried interest

When Scale Venture Partners Co-Founder Kate Mitchell began shifting her duties to a new generation of leaders, she came face to face with a common reaction: astonishment.

People were surprised to see her hand off the firm’s economics to a new group of partners, she recalls.

At the end of Fund IV Mitchell decided not to be key person in the next fund and turned over 40 percent of her economics to others.

“One of my partners said to me, ‘Wow. This must be really hard for you.’” she recounted. “And I said, ‘No. I’m not divesting. I’m investing … in you.’”

Surprise may be the first reaction when any longtime investor turns over the reins. It shouldn’t be. What should surprise is how many partners find themselves truly unprepared for the process.

“I think you have to steel yourself,” said Mitchell, who prepared over a decade by talking with industry peers, such as Senior Adviser Tom Crotty at Battery Ventures and Partner Felda Hardymon at Bessemer Venture Partners.

She also learned the so-called “Tarzan Strategy” from Gary Eichhorn, a former CEO of Open Market.

“He said, ‘You need to have your hand firmly around the next vine before you let go of the last one.’”

Mitchell’s new role includes remaining active with the National Venture Capital Association, serving on the board of SVB Financial Group and being available if things fall apart.

“I didn’t take another job,” she said. “I’m not going to the beach.”

VCJ recently spoke with Mitchell about the transition and what she learned from the process.

Q: Describe your new role as an advisory partner and how you spend your time.

A: I am an ongoing partner. [I’m] not investing in new deals. But I’m still supportive of the fund. [And] very importantly, I’m in an advisory role to help the leaders and all of the team and, to the extent it is helpful, any limited partner. Most of my time as an advisory partner is spent focused around the firm.

Q: What principles guided you as you began to think about generational transition?

A: We at Scale don’t believe that taking all the money we can raise and becoming a bigger fund is smarter. We think our strategy is best executed in the size we are. So that means if we have great people on the team, we’ve got to make room for them. Not just in doing deals. That means economic and leadership roles in the firm.

We’ve been talking about this since the beginning. It was two funds ago that I gave away 40 percent of my economics. I had been telling everybody, both LPs and the team, that my plan was in two funds to be a venture partner.

Q: How should carry be managed during a generational transition?

A: A couple things. Even with your very first fund and assuming your plan is to build a team, we did this with our very first fund.

What I did is I did it like a budget. Here is the carry divided by four because there were four of us (at first). We assumed these are the empty slots we had (and) we were going to reallocate carry in the next 24 months as we built out the team. So therefore, don’t get married to this number. Start focusing on that number.

Q: So the idea is to quickly spread the economics across the team?

A: In our fund, we share carry with associates who have stayed beyond two years. Once they become a senior associate, they get some carry. Our administrative team, finance and compliance, etc., participate in the carry. And we do that because it is a sense of joint ownership.

The philosophy we started with [is] you need to bring people in economically. People say, ‘We can’t do that.” Yes, [we] can. There is no law.

Q: What other impact did you notice from sharing the economics?

A: They feel a sense of ownership, too. It is like any startup. If you start with that philosophy, it is going to be easier on the other end because it is consistent.

By the way, it is carry and it is ownership of the management company, which no one talks about. Again, it’s what I said to [Partner] Ariel Tseitlin at Scale, ‘I’m not divesting, I’m investing.’

Q: You’ve been pretty open with your LPs. How did they react?

A: LPs were really interested, really engaged and ultimately really supportive. It is hard. LPs don’t like change. But there are ways you can manage it and communicate it over a series of funds. In our case, really over three funds by the time it goes from beginning to end. So it is almost over a decade.