The Challenge to Manage VC Funds’ Culture
“You can have all the right strategy in the world; if you don’t have the right culture, you’re dead.” Patrick Whitesell — Executive Chairman of Endeavor Talent Agency
The Venture Capital industry has been marked by large fraud cases such as that of Michael Rothenberg, who studied at Stanford and Harvard. Between 2013 to 2016, he defrauded his investors with approximately USD$18.8 million using this money for personal purposes rather than investing it in startups. His fund’s culture was characterized by an ostentatious lifestyle, high-profile social and sporting events, and limited transparency with its Limited Partners.
This reflects the decaying culture that led to the downfall of Rothenberg Ventures and the criminal prosecution of its founder. In a Venture Capital fund, as in any organization, not only capital and talent are required to develop the business. Culture is a fundamental element in the achievement of the fund’s success and significance over time.
Culture is a form of shared expectation and at the end of the day it is a form of social control. There are two elements to consider:
-Consistency of the membership: It refers to the stability of the team. Usually the turnover of the team at Venture Capital is low. This is because the industry is small, the funds want to preserve the expertise and network of team members
-Compensation: It is the mechanism to attract and retain the best talent. The culture of the organization is directly related to the compensation of the team. Venture Capital funds charge a management fee, which it’s used to pay salaries and operating expenses. Also, if the fund’s performance is positive, General Partners (GP) receive a portion of the profits (carry) generated throughout the fund’s life (typically 10 years). The GPs also contribute capital in order to align incentives with the Limited Partners.
Venture Capital’s culture rewards risk taking and results. Sometimes if the VC fund exceeds a certain performance, for example 3 times in Cash on Cash (CoC), the General Partner receives 25% of the carry instead of 20%.
Some Venture Capital funds establish a culture to last 100 years and make decisions based on it. Other funds do not care about the development of their people, or about the distribution of compensation according to the responsibilities in the team, this means that the funds do not last over time. An example to follow is Bessemer, since 1974 was established as a Venture Capital fund, today it manages USD$4 billion and has invested in more than 130 companies in the world.
Another aspect of culture are rules, usually unwritten. Standards that promote creativity in Venture Capital funds include risk taking, reward for change, and openness. Norms that promote implementation include common goals, autonomy, and belief in action to execute.
Generally, in Venture Capital funds, each partner is responsible for a sector or industry (ej. healthtech, education, fintech, retail-tech, etc.) or a geography (ej. US, Latam, Asia, Europe, etc.).
Culture is the element that creates the integration of team members, for example, a very well-known Israeli VC fund has a growth fund where only partners with more experience (+30 years) participate and another for an early stage where partners with less experience participate (+20 years).
The country of origin affects the culture of the fund. VC funds in developed economies tend to be a bit more agile, have greater depth of analysis, and better execution compared to funds from other geographies.
There are also cultural differences in funds of different asset classes. Private Equity funds are more risk averse, cautious and disciplined. In contrast, the culture of Venture Capital funds tends to be more flexible, agile and risky.
Some elements to consider when establishing the culture of a Venture Capital fund are the following:
1. Behaviors among the people who interact: The relationship between the personnel is the basis of the organizational culture. Be sensitive to this element when managing the culture within your fund.
2. The norms in the working groups: Define and clarify the written norms and ensure that the unwritten norms are adequate.
3. The values of the organization: It is of great importance to establish the values that will govern the team’s actions at all levels. An example is F2 capital, which permeates its motto ‘Power to the Founders’ throughout the organization.
4. The philosophy that guides the organization towards employee and customer policy: Establishes a solid policy that aligns the interests of the fund’s members and those of outsiders.
5. The feelings or climate in the workplace: This is one of the determining elements for a member of any organization to decide their permanence or departure, and therefore for the conservation or purpose of any organization. More than subjective, it is an element that depends on the congruence between what is expected based on the norms and what is done.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance & Venture Capital.
Ana Maury Aguilar. Investment analyst at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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