Reflecting on the “S” Word: Thoughts on the Execution of General Partner Succession

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On April 18, 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 retired. Ensuring the survival of Vintage was a responsibility that I owed to our investors, our portfolio funds and companies and our employees.

Venture funds take very long times to build and realize on their investments, in many cases, as long as a decade and a half or more. An engaged, energetic, committed and hungry venture management team is as important at the end of the fund as at the beginning and not just for funds ending their lives but for the two to three additional funds that were raised along the way. The importance of management team longevity is especially true in a challenged exit markets (as we are currently all experiencing). Succession management is more important now than ever before.

Unfortunately, very few VC managers have managed succession well. So, that is why 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.

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 own recognition that a long term team development plan is required and not as a result of LP questions during fundraising.

2. Implementing the Succession Process over a Period of Years. A fund management team needs to start the process and put the mechanisms in place at least 5 to 7 years before the current leadership team transitions out. It is very common for the founding or the current managing partner to start phasing out in their late 50s or, latest, early 60s.

3. Gradually Devolving of Management Responsibilities to the Younger Partners. Fundraising and other firm management responsibilities should be transferred gradually to the junior team, well 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 have to step aside and allow the new team to run the firm. It means that the older partners do not serve on the investment committee of new funds and leave the management decisions and certainly 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 next few funds at most 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 team and incoming management team.

How did we do against these six rules?

1. Founder Triggered and Timed Succession Process. We started the process at my initiative seven years ago, when I was 55 years old. 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 so that it would apply not only to me but to all general partners at the firm going forward. This ensured that every general partner knew in advance what the succession rules were.

2. Duration of the Succession Process. I started devolving responsibility gradually to my partners. My partner, Abe Finkelstein (now one of the Managing Partners), took day to day responsibility for the investment team three years ago. My partner, Keren Terner, was brought in a few years ago to gradually take over management of all the operational parts of the business. We also put in the agreements that at age 62, you cease to be an investing partner in new funds so that you did not cross age 65 with an active investment period.

3. Devolving of Management Responsibilities, Including Fundraising. My partners also started to become more active in fundraising a few years ago as well. Particularly important was passing on as many of the invitations that I got to speak at conferences and events to them so that they could build their own personal brands. We put them at the center of events we did for our LPs, particularly by speaking at, and by leading, our annual meetings.

4. A Full Management Transition. It was not simply 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 his or her views and give him or her outsized influence in a fund that they should not be managing at that point.

5. A Fair and Unburdening Economic Transition. I also 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 important that my economics in future funds would not get in the way of the new Managing Partners’ ability to build the future partner team. Just as it was important that there be a strong team to succeed me, it was no less crucial that there be a strong, incentivized team to succeed them too.

6. 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. We described the process in detail to our LPs, our GPs and to all our employees a number of years ago too. Everyone knew the timetable, as well as “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.” We as venture capitalists 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 own firms. None of this can work unless there is a warm, nurturing culture at our firms as well.

So, did this process work?

Today, my partners reported the close of a Vintage Growth Fund IV at $200m. The fund exceeded the $175m target and the $171m 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 that they have done so far and I am excited to watch them take the firm to a new level in the future.