How VCs’ Lack of Succession Planning Is Leaving Big Firms Without a Future
From the monarchs of yesteryear to the global CEOs of today, leaders have always had succession in mind. Even more so today; the average CEO is alone around for five years.
However, for many venture capitalists, the subject remains taboo.
As the industry expands, funding for European start-ups quadrupled between 2017 and 2022 to reach $94 billion — Venture capitalists will need to start succession planning if they want to keep their companies going for another 40, 50, or even 100 years. Some older US venture capital firms have already successfully transferred leadership, but many European firms have yet to think about who will take the reins when the original partners leave.
Last year, more than 50 new funds were launched in Europe – some by former investors in other VCs. According to William Prendergast, founder of Frontline VC, this is a sign of poor succession planning at larger companies.
“A lot of these people who are starting their own companies are just very entrepreneurial, so they want to do their own thing anyway. But I suspect that in more than half of those cases, people didn’t have the opportunities within their own companies.”
Why VCs Don’t Want to Think About Succession
The venture capital industry’s struggle with succession is based on how companies are structured. Companies are typically founded by a small handful of people, and their success depends on the ability of these people to raise funds, close deals, and support the founders.
“Historically, venture partners have been a bunch of cowboys: They’ve been doing their own thing, making their own deals, sitting on their own boards, selling the companies and not focusing on building companies that can last,” says Linus Dahg, who has just assumed the role of CEO/Managing Partner at Nordic VC Inventure.
Often, there simply isn’t room for all investors in a company to become partners. The profits of the fund, or carry, are distributed among the partners. More partners equals less carry for each. Partners, in most VCs, don’t get carry, but partners can get 10-20% acquired over six to ten years.
So there may be mixed messages from LPs (investors in the funds) about succession. They want companies to think about it, but they also want stability and long-term relationships with the investors who run the show.
“LPs are doing a lot of research on the fund before investing, both doing individual and group interviews. They have to be convinced that the group can work together for the 10 to 12 years that the fund lasts,” an investor who wishes to remain anonymous tells Sifted.
And in many cases, there are specific clauses in the contract between LP and VC that state that if some of VC’s key people leave the company, LP can withdraw funds.
Why succession is more relevant now and the risks of not planning for it
That “jeans VC” model might have worked when VC was a much younger industry and there was less competition. There’s plenty now: A record 314 European venture capital funds reached final closure in 2021, according to Invest Europe, an industry body.
Venture capitalists are hiring more junior investment staff to research and dig into deals with the goal of winning more and better deals. And to hire the best, companies need to be able to motivate them with a plan for how they can move up. If not, they run the risk of people leaving to found potential competing companies.
“If you don’t get to build a long-term plan for the people in the company, they’ll either leave to set something up for themselves or join another existing VC where they get more responsibility and a better opportunity for more involvement. impact,” says Inventure’s Dahg.
That can also be difficult when it takes multiple funding cycles for new partners to gain a meaningful stake in the company. Experts say investors will have to go through at least two or three funds to get a major stake.
“If you don’t have a succession plan, or it’s not clear how people can progress, the incentive you create is for everyone to eat what you kill: I’m going to make my deals, I’m going to be successful, and then I’ll figure out what I do next,” he says. turngast.
In Europe, where even the world’s most famous and successful firms, Northzones and Baldertons, are just over two decades old, there haven’t been too many hurdles yet.
In the US, companies like Sequoia and Benchmark have already gone through the process. Sequoia, for example, has gone through several senior leadership transitions in its half-century of history. Last year, Global CEO Doug Leone named Reolof Botha as his successor.
Phoenix Court Group, under which early-stage VC LocalGlobe sits, is one of the most high-profile examples of succession in Europe. Founder Robin Klein created LocalGlobe in 2015 with his son Saul’s and transferred leadership to Saul in 2018.
“If you look at venture capital as a musical that plays in the West End and runs for one season, it’s not designed to be sustainable.” saul klein He says.
“A VC fund typically has a life of 10 years, and I think a lot of people who start funds think about one or maybe two fund cycles. So they don’t end up investing for the long term, whether it’s developing their people or developing governance or developing succession planning.”
In 2021, LocalGlobe created an internal project called “next generation”.
“This is a four-year plan to build leadership capabilities within the business so that the next generation of leadership is ready to take on larger roles within that timeframe. And that’s something we’ve been very transparent about,” Klein says.
According to him, this not only involves the VC team but also the people in operations at LocalGlobe.
“Anyone in the company needs to have the ability to manage the business over time, regardless of what level they’re at, and whether it’s on the investment side or the operating side. It’s probably very different from other companies where the leadership is usually always on the investment side and the operating side is a lot like the back office,” says Klein.
Whichever way succession is planned, this is a topic that won’t be disappearing from the corridors of most VC offices anytime soon.
Mimi Billing is the Nordic correspondent for Sifted. She also covers healthtech and tweets from @MimiBilling.