The Next Don: How VCs Plan For The Future

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We all remember the last scene in The Godfather, where Michael Corleone is depicted as the next Don, taking over the role from his father as the figurehead of the mafioso Corleone family. As a viewer, we are partly left with a sense of relief — finally, Don Corleone’s wishes for his dynasty to carry on through his son will come true, Michael Corleone has finally accepted his destiny as a mob boss, and the infamous Corleone family will live on for another generation. Horsehead-in-the-bed behavior aside, the way that VC firms groom their talent isn’t all that different from how the older Corleone groomed his sons.

Here are the facts: the number of active VC firms are shrinking. There are now just over 800 active VC firms. Compare this to the 1,100 in 2002 when there was a boom of new firms rising from the ashes of the dot-com bust. There are a number of micro and macro reasons for this drop, but one of the reasons for the demise of many of these firms is poor succession management. These firms did not find, groom and promote the talent that would one day take over the firm and help it find the next Google or Facebook.

And there are crop of firms, many of whom we talked to, that rose in the 70s that have been doing this for years. The ones who have maintained their leadership, investor and LP reputation, been able to raise fund after fund, and manage several locations, have been able to master how succession management is done right.

As Emily Mendell, VP of communications at the National Venture Capital Association explains, succession management is one of the most important issues VC firms currently face. “The reputation of a firm is built on its partners, and a brand is built. But at some point those people leave and retire and if a firm doesn’t have the next wave of up-and-coming investors who are known to both LPs and entrepreneurs, they can have a big gap, and even have trouble raising a new fund,” she says. She explains further that there are a number of VC firms that have had trouble raising funding because there isn’t a proper succession-management plan in place.

We sat down with a number of leaders at various firms who have managed to pass the baton and thrive for decades.

NEA

Peter Barris, managing partner of well-known top-tier Silicon Valley VC firm NEA, recalls the moment when the founding partners (Dick Kramlich, Chuck Newhall and Frank Bonsal started NEA in 1978) handed him the baton in 1999, after he had been at the firm for seven years. He says that all of the founding partners were still involved in the firm, as well as active in board memberships and the overall direction of the firm. The fact that they were still actively involved in NEA at the time they passed is one of the key factors in making the succession a seamless transition, he explains.

He also credits the founders’ ambitions for wanting to create a “100 year firm” from the outset. “It was not about three guys coming together for a partnership, it was about creating an institution that would last for decades,” Barris says.

That way, he adds, the founders didn’t put their names on the masthead. They chose a generic name that would last and still have brand value years after they passed.

Now that Barris is at the helm, he is constantly finding ways to give people leadership responsibility to help foster a younger generation of partners who will one day lead the firm. He cites talented partners like Scott Sandell who runs the technology practice at NEA, as well as David Mott, who leads health care investments. And there is Pete Sonsini who runs enterprise investments and Harry Weller, who leads the firm’s East Coast practice.

“If you don’t take the approach that you are thinking of as a 100-year firm, then you are more likely to manage for short-term, which is to the detriment of the other partners at the firm,” he says.

Part of fostering talent and succession management at NEA is getting face time with LPs. “With LPs, we have a 12-year partnership. If you aren’t around, who is? It matters to them,” adds Barris. “Limited partners are in it for success of partners as well as the firm, and they want to make a bet on partners who will be involved in multiple funds.”

NEA has three face to face meetings with partners and the firm’s board of advisors, which is made up of larger LPs of the firm. The firm also has an annual meeting with LPs, where various partners present on their investment areas and get face time with the people who are investing in the firm.

Last year, NEA raised $2.6 billion for NEA 14, its 14th venture capital fund, and a raise that has been speculated as the biggest in VC history.

Kleiner Perkins Caufield & Byers

“Succession management is something we’ve done well and it’s really hard,” says Ted Schlein, a long-time partner at Kleiner Perkins who helps manage the firm.

“The generational transition has to be part of the culture of a venture firm,” Schlein explains. “It has to be built-in because VC firms are like a clay you are molding — the firm is in an ever-changing state.”

Schlein adds that the firm’s leader John Doerr rose through the ranks as an associate, and Schlein himself joined at a mid-point in his career (he joined the firm in 1996, Doerr joined in 1980).

One way that Kleiner tackles creating a deep bench of talent is to never have one partner work on one deal. Each deal that Kleiner does, has a senior partner and a younger partner. Schlein says that the firm believes the VC business is very much built around mentorship.

Part of creating that bench of talent is having a diverse mix of partners. He says that the firm has brought in younger talent like former Googler and product head for Square Megan Quinn. He says that prior to Quinn, it was Chi-Hua Chien, who has now been at the firm for five years. The firm has also brought in senior people like renown technology analyst Mary Meeker or former EA exec Bing Gordon.

“People are coming in from the side and below and that’s what makes this a great partnership,” says Schlein. But the challenge, he adds, is getting the right personalities and creating a chemistry.

Schlein brings up a good point in that without younger talent, or partners who have outside operational experience, firms risk being irrelevant in the current, dynamic world of technology.

Sequoia Capital

Doug Leone, one of the leading partners of Sequoia Capital, the VC firm founded by Don Valentine back in 1972, says “succession management is a huge issue if you have the notion of building a partnership that is enduring. Some venture partnerships are in the moment partnerships, and VCs need to have that crystal clear in their mind if they want a lasting firm.”

Leone, who is responsible for coordinating the daily work of Sequoia’s business, recalls that when Valentine handed the keys for Sequoia over to Michael Moritz and Leone in 1996, the founder didn’t ask Moritz and Leone to buy into the partnership. He trusted that the duo would help make sure that Sequoia would last for generations. Leone adds that Valentine is still involved in the firm and comes to partner meetings around 25 percent of the time.

Similar to Barris’s views, Leone credits Valentine’s choice of a generic name for the firm, which he says takes away the pressure when the original founders are gone.

The other element to doing succession management right, he explains, is to build a partnership where there is no single point of failure involved in changes. “Changes should happen in a way that nobody notices,” says Leone.

When it comes to actually grooming talent, Leone says that the firm likes to nurture talent and grow them from within. Younger partners and principals are working in tight-knit teams with experienced partners mentoring, with more junior staffers working on deal flow, and then as they mature, working directly with portfolio companies. “There is no notion of my deal at the firm,” Leone says.

He also cites the actual organization of Sequoia’s offices (there are no individual offices) as a way for junior partners and staff to work with senior partners.

Alfred Lin, the former COO and CFO of Amazon-acquired-Zappos, joined Sequoia in 2010, and he, along with former Googler Bryan Schreier, Aaref Hilaly and a few others, are part of the new, rising guard of VCs at the firm.

Lin tells us that even as young partners, responsibility is spread quickly, with plenty of interactions with senior partners on deals. Lin adds that within the first year of Sequoia, he was interfacing with LPs.

Leone says that the interaction with LPs is another way to tackle succession management. And often times, he adds, it’s the younger partners who have operational experience in newer technologies like mobile gaming, who can actually impart key knowledge on LPs and senior partners.

Greylock Partners

One VC who wished to remain anonymous points to Greylock as model example for succession management.

The firm infamously moved its headquarters to Silicon Valley in 2009 from Boston, with partners David Sze, Asheem Chandna, Workday founder Aneel Bhusri, James Slavet, and others helping lead the firm’s practice. The firm then added LinkedIn founder Reid Hoffman, former Mozilla CEO John Lilly, and enterprise guru Dev Ittycheria as partners.

Now Greylock has secured its place as one of the members of the elite group of top-tier firms in Silicon Valley, just a few years after basing itself out of the area.

Transition and Tradition

The next guard will lead a world much different than their predecessors. The families on Sand Hill no longer only compete against each other, but against a growing crop of Angels, Micro-VC’s, and Studios. They will start new practices and hire new types of talent to stay top-of-mind in a fast-paced ecosystem where seed checks are a commodity.

Michael Corleone led the family into a new set of dealings and geographies, including Vegas and Cuba. But as a viewer, you get the sense that he stuck with the values his father set. He led a transition, without abandoning the tradition.

What will that look like for Sand Hill Road?

Photo Credit/Wikipedia