3 Qualities to Look for in a Venture Fund Management Team
An investor in search of the right venture capital firm is the Goldilocks of the 21st century. As they sit in on pitch meetings and dive into the fund documents, everything seems to fall into place. The investment thesis resonates, the fund size makes sense, and the industry focus is exactly what the investor cares about, but there is one more pivotal factor that must be just right — the management team.
When deciding to enter into an oftentimes 7–10 year long relationship with a venture capital firm’s management team — the people who ultimately determine the investment’s success or demise — there are three main factors an investor must consider: Past performance, partnership, and skillsets.
“It takes about $10 million of investor capital to train a general partner.” [i]
Raising money for a first-time venture capital (VC) fund is often incredibly challenging because no one wants to be the one to finance the “training” of a General Partner (GP). Fund managers must prove that they don’t need such “training” by showing that they possess the knowledge and experience to choose the right investments and help guide those investments to profitable exits.
Here are some important questions to ask when considering a venture team’s past performance:
· Do the GPs have an investment track record?
· Are they able to prove their past successes?
· Will they admit to past mistakes? If so, have they learned from them?
Investors, or Limited Partners (LPs), rely on the venture team to use their varied experiences to make sound investment management decisions. It is important that the venture team is not just a group of people quickly huddled together based on soft commitments, but a cohesive unit built with the future of the fund in mind.
Important questions to ask when judging the strength of the team’s partnership:
· Are all the personalities on the venture team compatible?
· How long has the team worked together and, in that time, did they face and overcome any struggles?
· Do all the GPs and Venture Partners (VPs) have skin in the game? Has everyone who stands to profit invested their own money?
· Do all members of the team agree on and support the thesis?
· Is there overall support for the GP’s?
· Are there teammates who are redundant or does everyone offer a unique set of skills?
· Are the responsibilities and compensation structure for each team member clearly designated?
The skillset of the venture team is critical. A well-balanced team needs to have experience in a variety of areas including finance, coaching, fund management, advisory, capital raising, deal sourcing and structure, and most importantly exit strategy. No one person can be an expert in all these areas and that is where the value of a diverse team comes into play.
Important questions to ask when reviewing a venture team’s skillset:
· Does the team have the individual abilities to manage and lead their portfolio companies?
· Do any of the teammates have experience as board members?
· Do the managing partners have good listening and analysis skills?
· Does this team have a diverse and well-connected social network?
· Is the team comprised of people with entrepreneurial experience?
· Are there members on the team that have operational or commercialization experience or is it simply a team of finance guys and investment bankers?
Take the team of MPVF II as an example. Having raised and deployed MPVF I successfully, the GPs welcomed new teammates to bring additional depth and breadth of experience. The team now includes individuals from across the expertise spectrum, from venture, medical and finance to legal, regulatory and operations. Being globally and experientially diverse, each team member possesses a unique capability and individual responsibility to support the success of the fund and therefore a return on the LP’s investment.
When meeting with a VC fund team and considering an investment, don’t hesitate to ask questions. Spend some time considering these 3 qualities and make sure that the team behind your investment is just right.
[i] Ramsinghani, M. (2014). Chapter 7: How Institutional Investors Evaluate Fund Managers. In The business of venture capital: Insights from leading practitioners on the art of raising a fund, deal structuring, value creation, and exit strategies (pp. 89–91). Hoboken, NJ: Wiley.
-Written by Emily Thompson