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 role 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 capable of high-level execution with a culture of bold risk-taking.

The nature of venture capital necessitates that those in the firm often take on the role of investor, negotiator, diplomat, or any combination thereof, as a situation might dictate. However, all members are expected to act autonomously and make decisions that uphold its policies, values, and reputation and serve as its representatives when encountering founders and investors. 

Consequently, every team member within a venture firm will ideally fit into the firm’s culture and bring unique knowledge that their peers cannot. Building a venture team can, therefore, be an incredibly complex and multivariate task. As such, Managing Partners may want to consider optimizing towards a set of criteria for long-term success. 

Top 3 Factors to Optimize

Performance

Funds are typically judged on their returns to LPs at the end of their tenor. For many LPs, this can be the single most important metric of success.  When forming a team, it can be beneficial for fund managers to consider each team member’s past track record and future potential. As outlined in an interview with VC Lab, Steve Jurvetson points out that an investor’s past performance is a 6X better predictor of future success than the fund the person was previously at. Fund managers may want to consider this 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.

Sequoia Capital’s Doug Leone, who created the firm’s ‘Ten Tenets’ when he took over as Global Managing Partner, states in an interview with ‘Acquired podcast’ that the number one factor for them is performance. He says that if a person doesn’t have one, the other nine do not matter. He goes on to explain that their firm is not a family but rather a team. 

Firstly, new fund managers may want to ensure that each team member is a net contributor to the team and brings value to the table. It can be advantageous if each member of the team has 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 most VC funds, 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. Due to this, new fund managers can look to optimize for other factors to ensure long-term performance.

Culture

Culture is the fabric that holds you together

– Doug Leone, Sequoia Capital

When forming a team, a Managing Partner may want to foster an appreciation for different perspectives, personalities, and market views. However, new managers may want to act with care to not compromise on culture and fit. 

In the aforementioned interview, Steve Jurvetson talked about the importance of culture. He drew on examples such as Apple, Google, Oracle, who came from dynamic duos that provided a healthy balance to each other and set out a winning culture. A strong culture can often mean that the team wholeheartedly believes in and is obsessed with the mission. 

New fund managers may want to 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, it can be provident to 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 can create a butterfly effect. This is why some of the best VCs in the world help their portfolio companies in hiring at the early stages of development.

Diversity

Statistically, diversity leads to better performance, whether it’s diversity in gender, race, socio-economic background or domain expertise

– Steve Jurvetson, Future Ventures

As shown in the series of three reports by McKinsey & Co, diverse teams tend to outperform homogeneous teams with similar backgrounds, whether that is gender or ethnicity.

Therefore, as shown by independent studies, it can be beneficial for fund managers to impart an appreciation of diversity throughout their team. This is because diversity often leads to differences in views and vision of the future. In a collaborative and open team, this can lead to better decision-making in the long term and, therefore, better performance. 

In our exclusive VC Lab AMA, seasoned fund manager and mentor, Paul Bragiel stressed the importance of diversity. As shown in the Venn diagram of domain expertise below, the desired cross-section would ideally be small as possible between the team members.

This is because venture capital has a much broader domain today than ever before. It can be advantageous if each team member is an expert in their field and contribute something the rest cannot. When forming a venture team, it can be important that all members have a unique alpha on a certain market, technology, business model, other related focus, to identify unique investment opportunities the rest of the market has not.

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