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VC: Human Capital Strategy Options

Venture firms rely on the collective abilities of individuals and in many meaningful ways is a professional services firm. Therefore, human capital strategy is central to the business strategy of a venture capital firm. We have written about this in past Venture Patterns posts, such as Bring in Stars, Grow AUM, and Size is Strategy – Don’t Grow.

In terms of how to staff the investment team leaders (general partners), here are some of the basic choices a firm can make:

  1. Grow Your Own Partners
    1. Description: This involves hiring people and training them to be partners. The approach is to recruit less experienced people into the firm, train them and give them the option of working their way to partner. The model is like many other professional services firms where you can move up.
    2. Benefits: Proven talent can allow a firm to assemble a highly performing staff that works together according to a specific home-grown process.
    3. Trade Offs: Lack of diversity of thought can be an issue when everyone is trained in-house.
    4. Examples: Canaan and Emergence
  2. No Successor
    1. Description: Some firms may decide never to bring in new partners and simply shut down when the last partner wants to retire. The firm therefore only exists for a limited period.
    2. Benefits: Simplicity, focus and the maintenance of a solid core group .
    3. Trade Offs: Lack of long term growth, lack of career path for non-partners and less load sharing. If partners want to retire at different times, it can be hard for the remaining partners to run the firm with fewer people.
    4. Examples: Foundry Ventures used to take this position. (Do they anymore?)
  3. Solo GP (aka Solo Capitalist)
    1. Description: A lone general partner may operate without ever adding other partners. S/he may choose never to grow.
    2. Benefits: Similar to a “No Successor” firm, there can be simplicity and efficiency in operating alone.
    3. Trade Offs: Lack of diversity of thought or the ability to benefit from the insight of other partners. Lack of load sharing.
    4. Example: K9, Precursor, and Harrison Metal
  4. Mergers and Acquisitions
    1. Description: Mergers between firms are extremely rare, though they are theoretically possible.
    2. Benefits: Merging two pre existing groups can be a great way to consolidate resources and also promote diversity of ideas within a firm. It may be a way to bring in new leadership to an existing firm in need of a fresh perspective. It also allows you to grow quickly.
    3. Trade Offs: Rare and may be logistically complicated
    4. Example: Kliener Perkins reportedly courted Social Capital. Brown bought Next Gen VP.
  5. Carve Out or a Spinoff
    1. Description: Some number of partners decide to leave on their own (a spinout). LPs associate them with the brand of the place they’re leaving.
    2. Benefits: Organic/natural. People are making decisions that make the most sense for them
    3. Trade Offs: You could lose talent from your firm, if you wanted to retain those people.
    4. Example: Kleiner Perkins and Bond did a carve out.
  6. Affiliation/Related Firms
    1. Description: An umbrella brand connects a number of related firms with a decentralized decision making process and potentially geographic specialization. Also read, mental model: size is strategy. Economics can be shared in different ways.
    2. Benefits: Allows for the best of a small firm in terms of focus and then maintaining the brand of a larger organization. Decouple the complexity of a large firm from the brand power of a large/strong brand.
    3. Trade Offs: Very hard to manage for quality. How do you maintain one consistent brand? A misbehaving/low performing brand hurts the group for everyone.
    4. Examples: Draper Network or Village Ventures. A looser affiliation with local control of investment decisions is common pattern in US funds expanding to China or India.
  7. Add Non-Partners
    1. Description: Non-partners can help add additional expertise without being hired by a firm. They perform a role similar to consultants. For more on this: “What is a Venture Partner?”
    2. Benefits: Non-partners can help expand the resources available at a firm without some of the costs of a larger organization (e.g. muddied brand, lack of diversity, etc.)
    3. Trade Offs: They may not have the strongest understanding of the VC firm or its brand. They may not put as much time or effort as hoped.

By Miles Lasater with Julian Jacobs

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