The Human Element of Building a
Leading VC Firm
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About Rick FrisbieRick founded Battery Ventures nearly 25 years ago. In his current role, Rick acts principally as an advisor on the overall management and strategy of the firm. His current portfolio responsibilities are concentrated in the telecom sector and include MetroPCS (NYSE: PCS). |
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EmailIn December 2006 I was one of several panelists on an NVCA webcast focused on the human elements of building a leading VC firm. The topic is a critical one for venture firms that want to endure, and a particularly relevant one given the major changes that have occurred in the venture industry over the last 10 years. This article is based on the comments I made during that webcast.
The old venture organization model, and one still used today by many firms, is the flat model with all GPs essentially at the same level, performing the same tasks with relatively little overhead or bureaucracy. This model works extremely well with smaller teams, or perhaps even mid-size teams that have been working together for long periods of time. However for growing firms, the flat model doesn’t scale very well. As the number of investment professionals and areas of investment increase, it is very difficult to maintain consistency and quality without adding some organizational infrastructure.
Implementing a Hierarchical Model
At Battery, we have operated from the beginning with a hierarchical approach, and as we have grown this has become more essential. We have a relatively large venture capital organization with over 55 employees and 35 investment professionals. As a firm grows, the challenge becomes maintaining organizational control and consistency without becoming so bureaucratic that you lose efficiency or the ability to be good, visionary investors.
The way we’ve done this is with a Managing Partner (MP) who oversees all activities of the partnership. In particular, the MP role focuses on the investment committee process for new deals, portfolio guardianship, and investment team management. Our Chief Operating Partner, who works closely with the Managing Partner, is responsible for all administrative and non-investment related operational functions. The operational side has many moving pieces, but the most important and challenging part is the investment operations.
As noted, the two critical elements of investment operations are new investments and portfolio management. On the new investment front, each partner is the one ultimately responsible for his or her deal. For each deal the sponsoring partner generally works with a team of one to two other professionals. Additional oversight is provided through Investment Committees (IC), which are formed and populated uniquely for each individual "Hot Deal". The IC includes the Managing Partner and two or three other investment professionals who are partners or senior investment professionals and are familiar with the relevant industry. They typically meet two or three times prior to a new investment being made, and the role of the Committee is to review all aspects of the deal. They aren’t in place to approve an investment decision, but rather to provide advice and guidance, raise issues, maintain objectivity and give recommendations one way or the other. Ultimately it is up to the partner managing the deal to make the final decision, but the IC is very effective in preventing the Deal Team from prematurely "going native" on the deal and in assisting the team in making the best possible decision. This approach is consistent with the culture of our firm which is based on teamwork, but with the ultimate responsibility for each investment resting with the primary partner.
The second critical element is portfolio management. Once again, this falls primarily on the responsible partner, but we have a process of detailed quarterly reviews. In the reviews, the responsible partner meets with the managing partner and one or two other partners on each portfolio company. This occurs during the second week in the new quarter and focuses on portfolio company status and performance. Critical issues are identified and a game plan for addressing them is laid out. In each succeeding performance review, the company’s performance, as well as that of the responsible partner, is compared to the previous objectives. This process is time-consuming but effective to encourage action and to precipitate change. As we all know, in our business problems don’t go away by ignoring them. And the sooner we act the better the chances of success. Although I’d like to say that our partners are all very proactive and don’t need any outside influence, there is no doubt that this process encourages action.
So, through both the Investment Committees and the Portfolio Review Committees we are able to inject a level of discipline in the process which is fairly consistently applied, but doesn’t prevent partners from sticking with their convictions. Furthermore, there is a team approach, but without burdening the entire organization with the overhead associated with every deal. We also have one person, the Managing Partner, who knows what is going on with each deal and each portfolio company, and who is ultimately responsible for maintaining quality and consistency across both.
Decentralizing While Maintaining Quality
As fund sizes increase and as liquidity takes longer, the venture business is only scalable if you can decentralize without losing quality. To successfully create this decentralization in larger groups, you need a core group of people who have bought into the organization’s culture, values and approach. They need to respect and trust each other, and they need to know that they can count on each other.
An environment like this takes time to build and only works effectively when you have people who have worked together for 5-10 years. What we’ve found is that it is very difficult to build this type of organization quickly by hiring senior personnel from outside the firm. We will hire people at the junior partner level, but we feel that even there it takes 5 years or so before those partners are capable of managing within a decentralized group.
At Battery we’ve organized our firm into groups by sector or industry. There is nothing very surprising here. Each of these groups has one or two experienced partners who act as the de facto head of the group, although technically we don’t have a group lead. And many of our investment professionals are part of more than one group, which we think is critical, so the groups don’t become too insular. Once you start implementing features of decentralization, it’s important to avoid duplication of activities at the group and then at the firm level. As an example, at Monday staff meetings we briefly review all “hot deals” and significant portfolio issues, but the details are reserved for the decentralized groups, or the Investment or Portfolio Review Committees, where appropriate time and attention can be spent without dragging the entire organization through the specifics.
Stressing a Team Orientation and Long-Term Thinking
Although Battery clearly has a hierarchical structure with investment professionals at many levels from associate through senior general partner, we have a culture which stresses a team-oriented approach to investment and portfolio handling. In this team approach, the level of the investment professional is de-emphasized. Each member of the team is encouraged and expected to play a substantive role in gathering and analyzing the data, and in forming conclusions based on the data.
Our culture recognizes and values each individual’s contribution to the process. This approach fosters team work and encourages the development of strong relationships between the individuals. It is also an essential ingredient in the education of the younger investment professionals who learn by working closely alongside the more experienced members of the team.
To build a strong and enduring organization, we think the foundation is getting the investment professionals to put the interests of the firm first. All of our processes are focused on building the team-oriented culture where professionals are trained to sink or swim together. We de-emphasize individual recognition in favor of the team or the firm. Investment managers who can’t buy into that approach don’t last long at Battery.
On the other hand, we know that our business is fundamentally an individual business where each investment or portfolio decision is driven by one partner. We know that to be successful in this business an investment professional needs to have strong opinions, and shouldn't rely upon group think. So we strongly encourage and train our investment managers to think for themselves and to push hard for what they believe. We teach them to think “out of the box” and to embrace contrarian thinking. But we also teach them to think objectively based on the data collected, and the objectivity of the diligence can be improved through interaction with other experienced investment managers.
In addition to being a team business, this is a long-term business. Results play out over many years, and short-term performance is not the right metric to measure one’s performance. Although we all love to see early winners, we are not focused on short-term performance. In evaluating members of the investment team we look at much more than recent investment success. The overall qualities of the person are far more important, and we’ll hang in there with them even if they have several dry years. The message we deliver clearly to our investment team, both through words and actions, is that we will evaluate team members based on many factors other than just performance. The key factors we evaluate are commitment, passion, intelligence, judgment, team work and chemistry. And if they have the right qualities, we’re confident that performance will follow and we’re willing to wait for it.
It is interesting for us to look back historically at GP performance by fund. We don’t have any two successive funds where the same partner was the top performer. And we do have funds where the lowest performer has become the top performer (or vice versa) in the successor fund. So, as we evaluate the younger investment professionals, if they fit our model, or we believe they can grow into the profile of what we are looking for, we will stick with them through the dry years. This is a team business for us and at times an individual may be carrying the team. But there will be other times when the team is carrying the individual.
Crafting Compensation to Reinforce our Approach
We try to reinforce this team-based, long-term orientation with a compensation structure that is consistent. In general, compensation is not built around incentives for short-term performance, although there are certain bonuses for the associates and senior associates that do measure short-term deal generation performance criteria. However, the main focus is clearly on longer term rewards, primarily from the carried interest and also from ownership in the management company. All employees have a piece of the carry, and for all investment professionals there is a path to partnership and ownership in the management company based on the factors discussed above.
Battery has shown by words and action that we believe in management growth and succession Those partners who are dedicated to the firm and perform over the long term will have the opportunity to rise to the senior level and eventually run the firm. Most really good venture capital professionals have an entrepreneurial spirit, and we believe it is essential to create an environment where these types of managers can thrive. An environment like ours where the growth path is clear, and where there is no artificial ceiling, is very important.
The objective of our firm is to consistently produce returns that are in the top quartile of our industry, while also creating a work environment where the employees are happy and can thrive. To accomplish these objectives while also growing the firm requires a system that works. Battery has developed its “system” based on the core elements of team-oriented culture, decentralization with appropriate centralized oversight, and a compensation and career advancement approach that reinforces the long-term nature of our business and recognizes the ambitions of the team members.
© 2007 Battery Ventures. All rights reserved.