It’s Well Past Time VCs Hired HR Directors

Those following the Pao/KPCB saga in court yesterday were treated to the testimony of Trae Vassallo, a former Kleiner partner, who claimed on the witness stand that she too was uncomfortably propositioned by Ajit Nazre. Nazre was the Kleiner partner who Pao claims in her lawsuit harassed her after the two had a falling out. Vassallo said in court that when she brought this to the attention of a senior partner, he responded with “you should be flattered.”

Red Light.

Those familiar with human resources training might be surprised that senior managers were so ignorant of what was taking place at the firm. Sexual harassment training has been a mainstay of the corporate world for most of the time I have been alive, and such training has continued to expand in the 21st century.

Except in venture capital firms.

Here is a modest proposal: any VC firm with more than $150 million in assets under management should hire, at minimum, a part-time human resources professional on staff, someone who is given a mandate to improve the cultural side of the firm and not just to figure out TriNet and payroll.

Growing Pains at VC Firms

The lack of HR in venture capital firms is not a function of ignorance, but a function of growth. Much like the startups they invest in, venture capital firms all start from a small number of founders and expand over time. Starter funds are often in the low tens of millions, with one to three partners leading all the deals mostly without a support staff. The vast majority of firms that launch will eventually fail, unable to catch the next Facebook.

But a few firms will succeed, and potentially grow into behemoths. As they expand, that homogenous group of core founders begins to widen. In come the executive assistants and investment associates, a general counsel as legal work piles up, the fund financial managers and controllers, as well as the investor relations and public relations directors. Successful firms that were once three guys around the table (and yes, they are almost all guys), will continue to grow to potentially several dozen diverse people in the largest firms.

There is no right place or time for human resources to come into this equation. Certainly, venture capitalists don’t win points either with founders or limited partners – their two constituencies – in hiring someone to manage HR within a firm. The forcing function is often a lawsuit, or less seriously, the near miss of a lawsuit that leads to a general discussion about reputation risk for the firm.

There is a deep irony here when you think about it. Founders are always told by VCs to “focus on culture” to build a great startup, but the profession that does more to work on that problem always seems to be an afterthought. That’s frankly because their image of working on culture isn’t diversity training, but more injections of testosterone. Startups aren’t pushed to get human resources since their investors on the board don’t have human resources, and don’t understand why it might be important.

This is the largest challenge facing startups today.

Everyone But Startups Are Getting Better

From investment banks to management consulting and law firms, there were once many professional services that were homogeneously male. Looking at the statistics today, it is striking how far these industries have changed from their Mad Men-esque days.

That revolution didn’t just happen, but was driven by a concerted effort on management teams and specifically human resources professionals to make it so. These firms began significantly more aggressive recruitment programs for women, designed leadership development programs for them, created mentorship networks, and monitored promotions to ensure gender diversity.

Most importantly though, they engaged everyone in a dialogue about culture. Management consulting firms, driven to find new areas to advise and generate revenues, pushed “corporate culture” in the 1980s, leading to a huge expansion of effort on these problems. The testosterone-filled Wall Street culture of the 1980s may still be present in certain pockets, but the reality today has changed for the better. More work is always required, but the trajectory has been going in the right direction.

Top executives are not incentivized to think about these issues, which is precisely why the change had to emanate from people who hold direct responsibility over the matter.

It’s Not Economics

There is one fairly obvious gap between professional service firms and the denizens of Sand Hill Road: size. Goldman Sachs employs tens of thousands of people, while venture firms hire perhaps a few dozen in total. That makes the debate over HR so unnecessarily difficult, as there is still a persistent notion in the Valley that as long as you know everyone you work with, you don’t need these programs and trainings.

That’s why I am asking for HR to be hired at all firms above a $150 million AUM. At that level, the management fee structure on a single fund comes out to around $3 to $4.5 million per year, more than enough to cover the cost of this resource. And it doesn’t necessarily have to be full-time initially, although that would certainly be better in terms of integrating with a team. Maybe several small firms with less favorable economics could pool around a single HR professional.

More ambitious firms with a broader vision may even realize that this same HR professional could also advise their startups, and help them with their organizational growing pains as they begin to hire more employees. No one wants to harm a startup with a day of sensitivity training, but people in the startup world have often never worked in a workplace that required it before. We might not just avoid a lawsuit, but dramatically improve the culture and long-term growth of the company.

We might laugh at some of the metaphors HR professionals make, but we remember them, and they do end up working. And if they don’t, then these professionals can equally begin to handle the situation, and not just to tell someone that they “should be flattered” that their manager just asked them for a late night.

We need to make cleaning up our culture a top priority. It needs to be given to someone who makes this their sole responsibility and isn’t distracted on a day-to-day basis with chasing down the next investment deal. HR is the next great VC investment, if only the investors would show up.