How venture capital’s lack of succession planning leaves large corporations without a future

From the kings of the past to the global CEOs of today – leaders have always had the idea of ​​succession on their mind. over that day; The average CEO just exists for five years.

However, for many enterprising investors, the topic remains taboo.

As the industry expands – European startup funding has quadrupled from 2017 to 2022 to reach $94 billion Venture capitalists will have to start succession planning if they want their companies to stay in business for another 40, 50, or even 100 years. Some of the older venture capital firms in the US have successfully devolved leadership, but many European firms have yet to consider who will take over when the original partners check out.

Last year, more than 50 new funds launched in Europe Some by previous investors in other VCs. 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 are starting their own companies are highly entrepreneurial, so they want to do what they want anyway. But I suspect that in more than half of these cases, people didn’t have the opportunities within their own companies.”

Why venture capitalists don’t want to consider succession

The venture capital industry’s struggle with succession is how companies are structured. Companies are generally founded by a small handful of individuals, and their success depends on the ability of these individuals to fundraise, close deals, and support the founders.

“Historically, the venture partners have been a bunch of cowboys — they’ve been doing their own thing, doing their own deals, sitting on their own boards, selling companies and not focusing on building companies that can last,” says Linus Dah, who just took over The role of CEO / Managing Partner at Nordic VC Inventure.

Often there is no room for every investor in a company to become a partner. The fund’s profits are distributed – or transferred – among the partners. More partners equals less tolerance for each. Partners in most venture capital do not receive a load, but partners may receive 10-20% over six to ten years.

Then there can be conflicting messages from LPs (fund investors) about 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 fund research before investing, as they both conduct interviews at an individual and group level. They have to be convinced that the group can work together for 10 to 12 years managed by the fund,” an investor who wants to remain anonymous told Sifted.

And in many cases, there are specific clauses in the contract between the LP and the VC that say if some key people in the VC leave the company, the LP can withdraw the money.

Why succession is more important now – and the dangers of not planning for it

This “venture cowboy” model may have worked when venture capital was a much smaller industry and there was less competition. Now there’s a lot more: 314 European venture capital funds have reached final closing in 2021, according to Invest Europe, an industry body.

Venture investors are hiring more junior investment staff to do research and deal 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 that shows how they can work their way up. If not, they risk leaving to establish potential competitor companies.

“If you can’t build a long-term plan for the people in the company, they’ll leave to set up something themselves or join another venture capital where they get more responsibility and a better chance of having the biggest impact,” says Inventure’s Dahg.

Photo by Linus Dah, CEO of Nordic VC Inventure
Linus Dah, CEO of Nordic VC Inventure

It can also be difficult when it takes several funding cycles for new partners to acquire a significant stake in the company. Insiders say investors will have to go through at least two to three funds to get a significant stake.

“If you don’t have a succession plan, or it’s not clear how people can progress, the incentive you create is for everyone to eat what you kill—I’ll make my deals, I’ll be successful and then I’ll figure out what to do next,” Prendergast says.

Successful succession?

In Europe, where even the most famous and successful companies – the northern and Baldertonian regions of the world – are just over two decades old, there haven’t been many speed bumps yet.

In the US, companies like Sequoia and Benchmark have already gone through this process. Sequoia, for example, has gone through several top leadership transitions in its half-century history. Last year, global general manager Doug Lyon appointed Reolof Botha as his successor.

The Phoenix Court Group, under which an early stage VC LocalGlobe sits, is one of the most notable examples of succession in Europe. Founder Robin Klein founded LocalGlobe in 2015 with his son Saul and passed the leadership on to Saul in 2018.

“If you look at VC as a musical that takes off in the West End and runs for one season, it’s not designed to be sustainable,” he said. Saul Klein Says.

“A venture capital fund usually has a life of 10 years, and I think a lot of people who start funds think about one or maybe two fund cycles. So they don’t end up investing for the long term, whether it’s developing their people or developing governance or developing layout successions.”

Photo by Saul Klein, Managing Partner at VC LocalGlobe.
Saul Klein, Managing Partner at LocalGlobe

In 2021, LocalGlobe created an internal project called Next Generation.

“This is a four-year plan to build leadership capabilities within the company so that the next generation of leadership is ready to take on more senior positions within that time frame. This is something we’ve been very transparent about,” Klein says.

According to him, this includes not only the VC team but also the people who work at LocalGlobe.

“Anyone in the company should have the ability over time to be able to run the business, no matter what level they come in, whether they’re on the investment side or the operational side. It’s probably very different from other companies where the leadership is always on the investment side. And the operating side is very similar to the back office,” Klein says.

Whatever way succession planning is set out, this is one topic that isn’t going away anytime soon in the hallways of most VC offices.

Mimi Billing is a sifted Nordic reporter. They also cover health technology and tweets from @tweet

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