Built for now or built to last?
This issue of persistence and longevity is one that is frequently discussed within VCs, although it is often a hard topic for firms with hierarchical structures and concentrated ownership to discuss openly. Hunter alluded to it here, but I’d like to take the discussion in a different direction.
Let’s face it — being a larger VC with many funds and many layers of management fees is seductive to hold onto if you’re a managing partner, even if your personal financial goals have long since been achieved and your passion for helping to build that next transformational company has waned. By contract you are due the money, so why not take it? It is difficult to be a hard-driving person that has succeeded in building a highly profitable business and to willingly give up massive economics, especially when you’ve already received payoffs that have distorted your utility function as to whether your business lives or dies with the next generation. In essence there is no long game; you’re already made enough such that the long game doesn’t matter. It’s all about maximizing the short game, and who knows, a macroeconomic event might mess with future payoffs tomorrow.
In my experience both on Wall Street and in the venture business, extreme wealth distorts decision-making. Where someone who was empathetic when starting out and had a measure of humility then hit it big, oftentimes I’ve observed these people to both attribute their success largely to skill, and further to become less empathetic as to the value brought by others on their team. It’s almost as if money is a drug, and the more one has, the more one feels entitled to it as a reward for cleverness, intelligence and vision. As with most things, and particularly with venture investing, success takes a village if not an entire city. First off, it takes the founders and the team at the company. Then perhaps those on your team that helped analyze the initial investment, provide feedback and perspective and then help offer input throughout the life. And then maybe a co-investor adds a ton of complementary value to the founder and the team, raising the bar of strategic thinking, recruiting and perhaps even financing. Finally, let’s be honest and admit that timing and luck also play a role in a startup’s success. So at the end of the day, a “grand slam” investment is likely the result of many factors beyond the sponsoring partner’s control, and represents a “team win” far more than a solo victory. Yet somehow this is not the lens through which big wins are generally viewed; there is a single human attached to the victory on the investor side, and that human feels inordinately smart for having been so prescient for having invested in such a great company at such a fortuitous time. And this is how the hubris starts.
I think the rub is when long term optimization ceases to be the objective function, and short term maximization becomes the dominant strategy. This is where I’ve witnessed many venerable Silicon Valley firms to have faltered, when the “old guard” are happy to reap the annuities while the younger partners are blocked from the opportunity to enjoy the benefits of ownership that they’ve worked for over a 3, 5 or even 10 year period. And these promising young partners invariably leave for greener, more fertile pastures. Why this behavior? I have no idea. Perhaps at 53 I’m still too young to understand, or our strategy of keeping fund sizes small in order to try and align short term and longer term objectives makes me dull to the concern, but I honestly don’t get the angst of handing the reins to the younger generation, giving them the room the grow and the economic incentive to go all-in, and to sit back and bask in what the firm founders have created and to feel proud of seeding the next generation of company builders and value creators. I mean, seriously, how much does someone really need to make off management fees? The only way this has been achieved is by making carry money in the first place and, assuming I’m right, why not let those who are younger and hungrier drive the firm forward?
It seems to me that these are some of the reasons why generational succession is so difficult. It has nothing to do with a lack of highly motivated talent or those who have proven themselves worthy to lead a firm into its next phase. It has everything to do with wanting to hang on to one’s legacy — and fee stream — so tight that it jeopardizes the firm’s existence. And this I simply cannot understand.