Note: This article is the fourteenth in an ongoing series on venture fund formation and management. To learn more about managing a fund, download this free eBook today Venture Capital: A Practical Guide or purchase a hard copy desk reference at Amazon.com.
In Part I of this article we addressed the key skills you expect to see in the GPs at a successful firm. Now let's take a closer look at partner configuration and what other personnel resources are needed.
What’s the right number of partners at a venture firm?
Well, that depends on a variety of factors such as fund size, target portfolio size, number of expected board seats, and expectations regarding per-partner fee and carry income. You need enough partners to be able to manage the workload and cover a broad experience base, but not so many partners that decision-making and meeting scheduling are cumbersome and per-partner income is diluted beyond an acceptable level. That said, we believe that even for a very small fund, it’s wise to have at least two GPs. Even the most talented individual will be weak in a few of the skills we discuss above or weak on the administrative details of running a fund. In addition, most potential LPs are looking for some bench strength on the team and won’t want to invest in a single GP.
Another common configuration on a venture fund team is to have one founding GP with one or more Managing Directors and/or Venture Partners to help run the fund. How you build out your team and establish job titles is up to you as a founding partner. Just make sure everyone is clear on their roles and responsibilities.
What other personnel resources are needed within a successful venture firm?
Fund economics will drive some of your decisions on what resources you can afford to help manage your fund. A small firm with less than $20M under management might choose to have the GPs do all the work with the exception of legal, tax and accounting related tasks that are best handled by outside professional firms. For firms with bigger budgets, there are a variety of positions that need filling.
Analysts: For larger funds, recent college graduates and MBA program graduates are great resources for doing a lot of the grunt work that every firm has to take on. Responsibilities taken on by these junior team members typically include a variety of tasks such as industry research, deal sourcing and screening, due diligence, financial analysis and fund reporting. GPs will maintain their involvement in these tasks, but it’s always good to have a helping hand to ease the burden. If you plan to stretch your dollars by using younger lower salaried analysts, you should remember that analysts are often long on MBA theory and short on actual experience, so they are best used in decision-supporting roles rather than decision-making roles.
Finance and Administrative: Managing a venture firm’s growing portfolio along with managing the business of the firm can become a significant job over time. Portfolio management involves tracking your fund’s investments, staying on top of your capital allocation strategy, reviewing investment legal documents, sending funds to portfolio companies, collecting capital calls, reporting results to LPs on a regular basis and calculating and distributing proceeds as the fund winds down. Managing the firm’s business includes all of the usual tasks controlled by the finance department in almost any type of company. With all of these finance related duties, many venture firms hire a part- or full-time CFO.
Marketing: With more and more sources of financing available to entrepreneurs, getting your firm’s name and reputation out in the market is critical. Many VCs use social media and web publishing as vehicles for marketing their firm to entrepreneurs, LPs and other VCs. Just because it’s easy to set up a blog or twitter account and start writing, doesn’t mean your message will be heard. Venture funds need to build brand awareness just like any other company. Having marketing resources to help you build your brand and using social media alongside other marketing programs are much needed in today’s competitive environment.
Advisors: In the introduction to this article, we tell a story about building a venture firm with close ties to a large angel group. Having a large, talented pool of experienced entrepreneurs at your side gives you a critical edge in many dimensions. Your advisor network should help you to source deals, perform diligence and help portfolio companies succeed. They won’t do all this for free, but compensating them based on some of the carry from your fund should be sufficient motivation. It takes significant time on the part of the GPs to manage this resource, but it’s time well spent when you can keep them active and engaged.
Suffice it to say, there are few types of work which require a smaller team to cover a wider swath of competencies than venture capital. Good VCs tend to be very well-rounded people, drawing on skills typically associated with each end of the introversion/extroversion scale. VCs need the networking, communicating, people-skills kinds of traits which tend to be attributed to extroverts. And, they need those analytical, detail-oriented, self-guided, independent thinker kinds of traits which tend to be attributed to introverts. The team approach can help balance people out, but only to a limited degree. For reasons having to do with fund economics, teams tend to be relatively small. And for reasons having to do with accountability and ownership of one’s own outcomes, each VC tends to run his or her own deals from inception to exit. So it is work that realistically only suits a subset of people. Put another way, while virtually all very successful VCs tend to be pretty smart, well-rounded and accomplished people, not all smart well-rounded and accomplished people are meant to be VCs!