Finding a new partner for a venture firm bears more than a slight resemblance to finding a spouse.While indeed not as essential to life as a spouse, it may well be a person you spend more time with and talk to more than your spouse. It’s a high stakes quest. Last April, I set out on such a quest to bring a new partner into our firm, High Peaks Venture Partners.
To maximise the chances of success, I decided to make a totally open casting call with a blog post I wrote back in April. The motivation for that was simple — I couldn’t afford to engage an expensive search firm but I knew that the more typical quiet, behind the scenes, network-driven VC partner search would not cast a broad enough net. I wanted to make sure that everyone knew about it, that as many people as possible sent me recommendations, and that people who might not have even been actively thinking about doing something different heard what we were up to and were triggered to give it some thought.
The post generated quite a response. It was tweeted, shared & viewed 10x more than my average post. And it had exactly the desired effect — it generated a lot of very interesting inbound inquiries. I heard from roughly 150 legitimate candidates, over 2/3 of whom I did not previously know. And it definitely surfaced some people that a quiet, network search never would have gotten to.
Some data on that pool at the top of the funnel:
- 12 partners at larger, east coast venture firms
- 1 partner from a west coast firm
- 18 non-partner level VCs
- 5 former VCs turned operators, interested in coming back to VC
- 20 angel investors
- >50% operators without extensive investing experience
- 12 investment bankers
- 8 corporate development/M&A guys from large corporations
- 4 women
That’s right — only 4 women. And 60 days into the process I hadn’t heard from or been connected to even a single woman. I was shocked. But quality is of course what matters, and 2 of those 4 women emerged amongst the 8 most interesting candidates in the lot.
I met with more than a third of those who reached out – resulting in 65 first meetings. Some of those were long shot candidates, but people I knew would at the very least be interesting to meet and know. May and June became a supercharged 60 days of networking. I had more drinks and coffees than I care to remember. I met some incredibly talented people, some of whom have become collaborators on projects since, and a few of whom have become friends. It was a uniquely valuable sprint.
I spent well over a month of man-hours on this project over an eight month period. It was gruelling, it was distracting, but it was a tremendous education. I met incredible people and learned a ton about the market, about myself, and about my firm. By December, I found an incredible new partner, Ben Sun, who is coming to the venture capital world after an impressive track record as an entrepreneur and angel investor.
What I Learned about the Screwed-Up State of the Venture Industry
As I now reflect back on the process, I learned a lot not only about my firm and myself – I learned some very interesting lessons about the state of the venture industry. I realise that my previously held belief that the venture industry is in need of some rather fundamental change was far too mild. I think it needs a full-on reboot.
As an industry, we are still by and large entrenched in a structure and set of firm dynamics that were established or reinforced in the bubble years. Yes, we may be slowly beginning a transformation, but my partner search brought me face to face with dynamics that continue to damage industry returns and retard the pace of change.
I say this primarily based on my observation of the calibre of people I spoke to and the challenges they were facing in their current positions. I was, to put it bluntly, astonished by some of the people who were interested in working with me, and appalled by the stories I heard about the firms they were considering leaving.
Granted, I have only the perspective of the people with whom I spoke to go on, and that’s clearly a non-representative sample of the industry. But I think it’s also a large enough sample that it tells an interesting and directionally important story.
Here’s the deal: I’m proud of the work we’ve done at High Peaks and the place we’ve started to carve out for ourselves in the industry. But I have no delusions about our relative position in the world. We’re still a startup, we’re still very small-time, and we’ve got a long way to go before becoming a brand that truly matters in the industry.
But despite that, my casting call for a partner surfaced some truly extraordinary talent, including folks from firms that never should have given these partners any reason to even consider going anywhere else.
I can summarize the dysfunction I see in the industry with a few key themes that emerged loud and clear from my conversations with both partners and principals at some top east coast firms. (I emphasise that these themes really can only be said to apply to the east coast portion of the industry. I did not speak to enough west coast talent to have a view of the dynamics out there.)
- Many of the most successful and powerful firms of the 90s remain controlled by partners who built them, with very little genuine interest in transitioning governance rights or economics to a next generation, regardless of the sources of the firms’ more recent successful deal making. In one standout instance, a younger general partner told me that the two founding partners of his large, northeast firm were paying themselves $12 million+ each in management fee each year while younger “partners” were paid at best like principals at other firms. Admittedly these other partners were still earning a fine living, but the imbalance hardly inspires a culture that is likely to inspire long term success. Not to mention the question of what incentive a guy has to drive profits for his investors when he’s making $12-15 million/year regardless of performance.
- The dynamic between LP (the legal term for investor in a venture fund) & VC seems to strongly reward the status quo rather than evolution and effective succession planning within partnerships. LPs seem to heavily emphasise the importance of continuity and stability in partnerships. This is a logical and easily understood bias. But it creates a powerful disincentive for partnerships to admit that someone has become unproductive and move them out of the firm.
- This dynamic is exacerbated by the elongated feedback cycle that characterises the venture industry. It takes many years to figure out who’s really a good investor, and it similarly can take years and years for a firm be forced to face reality about who’s not good (or no longer is). As a result, organisations remain overly influenced by the results of 5 or even 10+ years ago. A partner who had a few good exits in 2004-2006 but has done very little new & interesting since then is likely still riding on those old successes. In my discussions I learned in great detail about partners at a number of firms who have failed to generate even a penny’s worth of returns since the 90s, yet still occupy a coveted partner seat. Add this all together and, particularly as fund sizes are stabilizing or shrinking, there are far too few new seats opening up at the partner table of many firms.
- Today’s LP environment remains committed to buying mostly the same products they’ve been buying for 15 years, almost irrespective of recent performance or an honest assessment of likely future performance. While there are dozens of talented young partners at large firms – individuals who are in many cases the most important drivers of those firm’s recent successes and are likely more tightly connected with today’s leading entrepreneurs, the fundraising environment is so biased against new funds that it is harder than ever for this talent to spin out and successfully raise new funds. To be clear, there are several very notable exceptions in the LP community, but by and large the group is not responding to some pretty compelling new opportunities. And they’re continuing to buy some pretty lousy products.
As a result, I spoke with individuals with terrific track records who are likely to either stay unhappily where they are or do something crazy like consider joining a tiny firm like mine that has only a modicum of fundraising history and success rather than forge out and start their own partnership from scratch. Competition, diversity, and vibrancy in the industry suffer greatly as a result.
Ultimately, I was blessed to have the ability to consider the candidacy of a number of individuals who deserved much better. And I was flattered by their interest. Several of them quite understandably concluded that despite their frustrations with the lack of innovation and upward mobility offered by their existing firms, the economic risk of joining something smaller and less proven was too high a hurdle. In other instances, I concluded that the individuals had seen the truly entrepreneurial spark beaten out of them by the firms they had been at.
In the end I chose a partner from outside the industry. Some might say it’s a risk – why go with a non-established VC when faced with a wave of interesting talent who are frustrated and limited by their current situation?
To me, it’s simple. I want the best partner to help me write the next several chapters of the High Peaks book. While Ben’s got a fantastic track record as an angel investor (one of the best track records of all the individuals I spoke with – VC or angel), he will bring a fresh set of eyes, an innovative style, and different type of energy to our firm and the industry. I couldn’t be more excited about it.
But at the same time I’m also concerned by what I saw and learned along the way to finding Ben. It suggests that our industry will continue to evolve far more slowly than it should and that the mediocre performance that has characterised the past 10 years will persist as a result.
That’s not good for me, it’s not good for the venture industry as a whole, and so it’s not good for entrepreneurship and innovation in America. That’s something we all need to worry about.