From monarchs of old to global CEOs of today, leaders have always had succession in mind. Even more today; the average CEO has only been there for five years.
Yet for many VCs, the subject remains taboo.
As the industry grows – funding for European startups quadrupled from 2017 to 2022 to $94 billion – VCs will need to start planning their succession if they want their business to keep running for another 40, 50 or even 100 years. Some older US venture capital firms have already transferred leadership successfully, but many European companies still haven’t thought about who will take the reins when the original partners step down.
Last year more than 50 new funds were launched in Europe, some by former investors from other venture capital firms. According to William Prendergast, founder of Frontline VC, this is a sign of poor succession planning in large companies.
“A lot of these people who start their own business are just very entrepreneurial, so they still want to do their thing. But I suspect that in more than half of those cases, people didn’t get the opportunities within their own company.
Why VCs don’t want to think about succession
The venture capital industry’s struggle with succession is rooted in the way companies are structured. Companies are usually founded by a small handful of individuals, and their success depends on the ability of these individuals to raise funds, close deals and support the founders.
“Historically, venture capitalists have been a bunch of cowboys – they did their own thing, did their own business, sat on their own board, sold the companies, and didn’t focus on building businesses that can last,” says Linus Dahg, who has just taken on the role of CEO/Managing Partner at Nordic VC Inventure.
Often there simply isn’t room for every investor in a company to become a partner. The profits of the fund – or carry – are divided between the partners. More partners equals less carry for each. Associates in most VCs do not receive carry, but partners can get 10-20% vesting over six to ten years.
Then there may be mixed messages from LPs (fund investors) on succession. They want companies to think about it, but they also want stability and long-term relationships with the investors who run the show.
“LPs do a lot of research on the fund before investing, both doing individual and group level interviews. They need to be confident that the group can work together for the 10-12 years the fund is in operation” , an investor who wishes to remain anonymous told Sifted.
And in many cases, there are specific clauses in the contract between LP and VC that state that if some of the key people in the VC leave the company, the LP can withdraw funds.
Why succession is more relevant now – and the risks of not planning for it
This model of “cowboy VCs” might have worked when VC was a much younger industry and there was less competition. Now there are plenty: a record number of 314 European venture capital funds reached their final close in 2021, according to industry body Invest Europe.
Venture capital firms hire more junior investment staff to do deal research and due diligence with the goal of winning more and better deals. And to hire the best people, companies need to be able to motivate them with a plan for how they can progress. Otherwise, they risk people leaving to found potential competing companies.
“If you fail to come up with a long-term plan for the employees of the company, they will leave to create something on their own or join another existing VC where they get more responsibility and a better chance of success. have a greater impact,” says Dahg of Inventure.
It can also be difficult when it takes multiple rounds of funding for new partners to gain a meaningful stake in the venture. Insiders say investors will need to go through at least two to three funds to get a significant stake.
“If you don’t have a succession plan, or if you don’t know how people can progress, the incentive you create is for everyone to eat what you kill – I’ll do my thing, I’ll be successful and then I’ll figure out what I’m doing afterwards,” says Prendergast.
Succession successful?
In Europe, where even the most famous and successful companies – the Northzones and Baldertons of the world – are just over two decades old, there haven’t been too many speed bumps yet.
In the United States, companies like Sequoia and Benchmark have already gone through the process. Sequoia, for example, has seen several leadership transitions over its half-century history. Last year, global chief executive Doug Leone named Reolof Botha as his successor.
Phoenix Court Group, under which LocalGlobe VC is headquartered, is one of the most prominent examples of succession in Europe. Founder Robin Klein created LocalGlobe in 2015 with his son Saul and transferred management to Saul in 2018.
“If you think of venture capital as a musical that goes up in the West End and lasts a season, it’s not designed to be sustainable,” says Saul Klein.
“A venture capital fund normally has a lifespan of 10 years, and I think a lot of people who start funds think about one or maybe two fund cycles. They therefore do not invest in the long term, whether in the development of their staff, the development of governance or the development of succession planning.
In 2021, LocalGlobe implemented an internal project called “next gen”.
“This is a four-year plan to build leadership capacity within the company so that the next generation of leaders is ready to take on greater roles within this timeframe. And that’s something we’ve been very transparent about,” Klein says.
According to him, this does not only involve the VC team, but also the people in charge of operations at LocalGlobe.
“Anyone in the business should have the ability, over time, to manage the business at any level, whether on the investment side or the operations side. It’s probably very different from other companies where management is usually always on the investment side and the operational side is a lot like the back office,” Klein says.
Regardless of how succession is planned, it’s a topic that won’t be disappearing from the halls of most VC offices anytime soon.
Mimi Billing is Sifted’s Nordic correspondent. She also covers health tech and tweets from @MimiBilling.