In our series examining the intricacies of building a successful and enduring venture firm, we will explore the minutiae of forming a venture team that can capitalize on market opportunities.
Across the whole organization of a venture capital firm, there is no single position endowed with greater responsibility than that of a managing partner. It is the responsibility of the managing partner to outline a thesis of capturing value in the market and to create a team and culture of bold risk-taking and high-level execution.
The nature of venture capital necessitates that those in the firm must take on the role of investor, negotiator, diplomat or any combination thereof, as a situation might dictate. All members are expected to act autonomously and make decisions that will uphold the policies, values and reputation of the firm and act as its representatives when encountering founders and investors.
Consequently, every team member within a venture firm must both fit into the firm’s culture and also bring unique knowledge that their peers cannot. Building a venture team is, therefore, an incredibly complex and multivariate task and managing partners must aim to optimize towards a set of criteria for long term success.
Top 3 Factors to Optimize
Every fund is judged on its returns at the end of its tenor and it is the single most important thing for LPs. When forming a team, fund managers must consider each team member’s past track record and future potential. A person’s past performance is a much better predictor of future success than the fund the person was previously at. So fund managers must take this into account when weighing an individual who has a better track record to someone who is coming from a name brand VC, who has not performed as well.
Sequoias Capital’s Doug Leone, who created the firms ‘Ten Tenets’ when he took over as Global Managing Partner, states in an interview with ‘Acquired podcast’ that the number one goal for them is performance. He says that if a person doesn’t have one, the other nine do not matter. He goes on to say that their firm is not a family but a team.
New fund managers must firstly make sure that each team member is a net contributor to the team and brings value to the table. Each member of the team must have some unique vision and insight which will lead to finding a winning startup that will return the entire fund or more.
Though performance is the number one goal of every fund, it is hard to achieve. In venture capital performance is measurable, however, there is around a 10-year time lag, making an assessment of performance tricky in the short term. New fund managers must also optimize for other factors to ensure long term performance.
When forming a team, a managing partner must foster an appreciation for different perspectives, personalities and views of the market. However, new managers must not compromise on culture and fit.
In his interview with VC Lab, Steve Jurvetson talked about the importance of culture and drew on examples such as Apple, Google, Oracle ..etc, who came from dynamic duos that balanced each other out and set out a winning culture. A strong culture means that the team believes and is obsessed with the mission.
New fund managers should consider instilling and fostering an atmosphere of debate and respectful discourse. Funds with rigid hierarchical structures tend not to have a climate of discussion and new members have the role of subordinates, rather than equals who can freely voice their opinions. This open climate leads to better decision making and the so-called battle of ideas usually triumphs over more rigid forms of decision making.
When hiring and forming a team, fund managers must be very selective about how an individual fits into the wider team and mission. The group of first hires will be responsible for hiring others in the future, so their selection and other biases will create a butterfly effect. This is why some of the best VCs in the world help their portfolio companies in hiring at the very early stages of their development.
The data clearly shows that diverse teams outperform homogeneous teams with similar backgrounds, so fund managers must impart an appreciation of diversity throughout their team. Diversity leads to differences in views and vision of the future. In a collaborative and open team, this leads to better decision making in the long term, and therefore better performance.
In our exclusive VC Lab AMA, Paul Bragiel stressed the importance of diversity, where if you had a Venn diagram of a domain of expertise, the desired cross-section would be small as possible between the team members.
This is because venture capital has a much broader domain today than ever before. Each team member must be an expert in their field and contribute something the rest cannot. When forming a venture team, it is crucial that all members have a unique alpha on a certain market, technology, business model …etc, to identify unique investment opportunities the rest of the market has not.
This content is provided by VC Lab, the venture capital accelerator.
The free 16 week VC Lab program provides guidance, structure and a network to complete a fund closing in 6 months or less. Since mid 2020, VC Lab has helped launch 83 venture capital firms around the world.