Nearly 10 years ago, in April 2015, I published a blog called “Confronting the ‘S’ word: Dealing with general partner succession.” As the founder and managing partner of Vintage, I wanted to ensure that Vintage would survive after I retire. Ensuring the survival of Vintage was a responsibility that I owed to our investors, portfolio funds, companies, and employees.
Venture funds take a long time to build and realize their investments — in many cases, more than a decade and a half. An engaged, energetic, committed, and hungry venture management team is as vital at the end of the fund as it is at the beginning. This is true for funds ending their lives and for the two to three additional funds raised along the way. Management team longevity is vital in challenged exit markets (as we are currently all experiencing). Succession management is more critical now than ever before.
Unfortunately, very few VC managers have managed succession well. So, in 2015, I decided to research the best practices in succession management and interviewed the managing partners of several of the world’s leading VCs to see what worked (and did not) in managing their succession processes.
[The succession process] requires an open and genuine dialogue between the senior retiring and incoming management teams.
At the time, I identified “six rules of succession”:
1. GPs must proactively manage and time succession: The worst thing a fund manager can do is deal with this issue during fundraising for a new fund. The process needs to be triggered by the GP’s recognition that a long-term team development plan is required, not due to LP questions during fundraising.
2. Implementing the succession process early: A fund management team needs to start the process and implement the mechanisms at least five to seven years before the current leadership team transitions out. It is common for the founding or the current managing partner to start phasing out in their late 50s or early 60s.
3. Gradually devolving management responsibilities to the younger partners: Fundraising and other firm management responsibilities should gradually be transferred to the junior team before the final transition date.
4. A true and full management transition: A successful transition requires just that: a full transition. The founders and managing partners must step aside and allow the new team to run the firm. It means the older partners do not serve on the investment committee of new funds and leave the management and all the new investment decisions to the younger partners.
5. A true economic transition as well: There also has to be a transition in economics. In our research, we found that relatively small, residual economics (carried, but rarely management fee) is given to the older team for the following few funds following retirement.
6. A visible and clear succession process: The process must have both visibility and certainty. It requires an open and genuine dialogue between the senior retiring and incoming management teams.
How did we do against these six rules?
Today, my partners reported the close of a Vintage Growth Fund IV at $200 million. The fund exceeded the $175 million target and the $171 million Vintage Growth Fund III. Almost all our large investors re-upped, and new investors joined. I also became an LP. I am very proud of my partners and the great work they have done so far, and I am excited to watch them take the firm to a new level in the future.
Here’s how we did it:
Founder triggered and timed succession process
My firm started the process at my initiative seven years ago, when I was 55. We did not wait for the LPs to tell us to do this. We put the succession provisions into an agreement among the general partners to apply to me and all general partners at the firm in the future. This ensured that every general partner knew the succession rules in advance.
Duration of the succession process
I gradually started devolving responsibility to my partners. One partner, Abe Finkelstein (now one of the managing partners), took day-to-day responsibility for the investment team three years ago. Another partner, Keren Terner, was brought in a few years ago to gradually take over the operational management of the business. We also agreed that at age 62, you cease to be an investing partner in new funds so that you do not cross age 65 with an active investment period.
Devolving management responsibilities, including fundraising
My partners also started to become more active in fundraising a few years ago. It was essential to pass on as many of the invitations I got to speak at conferences and events to them so they could build their brands. We put them at the center of events for our LPs, particularly by speaking at and leading our annual meetings.
A full management transition
It was more than my ceasing to be an investing partner in new funds at age 62; for a full transition to be completed, I told my partners that it would be a mistake for me to sit on the investment committee of the new funds raised. When a founder is at the table, it undermines the newer leadership because there is a tendency to turn to the founder for their views and give them outsized influence in a fund that they should not be managing at that point.
A fair and unburdening economic transition
I provided that my partners would not have to buy me out. I have a relatively small tail for a few funds, but I felt it essential that my economics in future funds not get in the way of the new managing partners’ ability to build the future partner team. Just as there needed to be a strong team to succeed me, it was no less crucial to have a strong, incentivized team to succeed them, too.
A very open and even public process
The whole succession process was open and visible. We have been openly talking about this for the last seven years. Several years ago, we described the process in detail to our LPs, GPs, and all our employees.
Everyone knew the timetable, “the how,” and “the what.”
Finally, I noted in my 2015 blog that “effective succession requires an overriding element that goes well beyond the mechanics of the process. That element is establishing a firm culture and embedding that culture in the team that takes the reins of the firm.”
As venture capitalists, we are very focused on the culture of the organizations in which we invest. Unfortunately, we devote too little time and attention to the culture of our firms. This can only work if there is a warm, nurturing culture at our firms as well.