What Is A "Venture Partner" And Why Does It Matter To You?
A reader asked me to blog about the "Venture Partner" role in VC firms. I thought it was a good suggestion so here goes.
A Venture Partner is a person who a VC firm brings on board to help them do investments and manage them, but is not a full and permanent member of the partnership. The "full and permanent" members of the partnership are often called General Partners, Managing Members, or Partners. Lawyers don't like the term General Partners and more and more firms are avoiding that term.
Venture Partners are different from "Entrepreneurs In Residence" (EIRs) because they are expected to source multiple deals and manage them whereas an EIR is expected to source a single deal and then leave to run it.
There are examples of Venture Partners who have been with VC firms for many years so they can be a fairly permanent part of the team. But for many reasons the Venture Partner term reflects the fact that the firm and the individual are not as tightly committed to each other as the members of the partnership are.
Some common examples of Venture Partners are; former partners who are semi-retired but still want to be able to do deals, former entrepreneurs who have multiple business interests but want to be able to do deals with a VC platform, and a partner in waiting who is headed to become a full partner.
My partner Albert Wenger is an example of the latter. Albert was the President of Delicious and when it was sold to Yahoo!, he left Delicious and started a company with his wife Susan called Daily Lit. Brad and I thought that Albert would make a great partner for us, but did not have room for a third partner in our first fund. We did want to work with Albert right away. So Albert joined us as a Venture Partner for about 18 months and then when we raised our second fund, he became a full member of our partnership. That was a great way to bring Albert into our partnership.
Venture Partners' compensation varies by firm and by role. Some Venture Partners receive cash compensation and some do not. A lot depends on how much time they spend at the firm and how deeply they are involved in day to day operations. All Venture Partners receive carried interest on the deals they source and manage. The amount of carried interest also varies a lot from firm to firm. The high end of the range is about 25% of the total carry on the deal, which would be 5% of the profits in most firms since a 20% carry is most common in the VC business. I have heard of firms where 1% of the profits or 5% of the total carry is what a Venture Partner gets. I feel that is way too low but I guess others do not.
One thing to be careful about if you are joining as a Venture Partner is the fact that a firm cannot share carry that it does not have. What I mean by this is that if you generate a $50mm gain for the firm on a deal and so you earn some percentage of the $10mm of carry on that deal, you may not get paid that carry if the firm's other investments are bad and the total gains on the fund are non-existent. I have seen this happen to friends and it is more common than you might imagine.
So if you are an entrepreneur, why should you care about Venture Partners? Well from time to time, the sponsor of your company inside a venture firm might be a Venture Partner. And so you need to understand the pros and cons of that.
On the plus side, many Venture Partners are very experienced, either as VCs or successful entrepreneurs. They are not likely to be "wet behind the ears newly minted MBAs." So you when you are dealing with a Venture Partner, you are probably dealing with a secure and successful and experienced individual who can help you out.
On the negative side, they are not full members of the firm so their weight inside the partnership may not be as full as you might like. This can result in difficulties in follow on rounds and other important decision points. And they might not stay affiliated with the VC firm for the entire life of your company's existence. Which means you might get someone else managing your investment down the road. And in my experience, that is almost always a recipe for disaster. There aren't many things worse for an entrepreneur than someone else taking over an investment they did not sponsor.
So if you are dealing with a Venture Partner, you really need to understand his or her specific situation. You need to asses how likely they will be with that firm for the seven to ten years you are going to need from them. And you need to assess how influential they are in the firm and how likely they will be able to support you when you need it.
I am a fan of the Venture Partner model. We used it with great success with Albert and I can easily see us doing it again. It works well in the right situation with the right people. But there are risks with the model, for the Venture Partner, the VC firm, and most importantly, for the entrepreneur. So it is important to understand the role and what it means for you.
Venture Partners´ compensation (carry) is subject to the GP´s having carry?If so, it doesn´t seem to be a well balanced situation for VPs´: they have no responsibility for the other portfolio investments and they only take the bad part of the equation, but never the potential over performing side of the fund. How do you solve this?
Don’t be a VP at a fund that doesn’t make money.I know it is not that simple. But there are funds and general partners that have a long track record of making money. Those are better bets
The first business plan i made was reviewed by a elderly person (i was told to contact and he will guide me). When he handed over his business card it read “Entrepreneur in Residence” … i was wondering what is this post? Is he an entrepreneur who retired and resting at his residence? I have to Google to find the meaning….funny title anyways.He gave me one of the best feedback for me … when i was presenting my business plan … i had a backup plan … even before start … he said…”back up plan?”… you know what is your backup plan?Go back and join GE again make your money don’t try to be an entrepreneur. Entrepreneurship come with a tag “No Backing up”.And he never looked at my backup plan.
LOL!You mean the “Entrepreneurs Inn Residence” = the place where they park crotchety old aging entrepreneurs, to live out their years.Business school Bingo, overcooked beef and boiled carrots, and kind nurses listening to the same old pitches over and over and over and over.
Is this an uninteresting post or the tribe is still asleep? Never seen a post at AVC going without comments for few hours after posting.
Most people in the US are still asleep and its a weekend in August
I think this is a post where I knew nothing to add to the discussion. So I’m kinda just sitting back and digesting it. :)There is a quote attributed to Mark Twain “Better to keep your mouth shut and be thought a fool than to open it and remove all doubt.
how do you know what kind of questions to ask then
Listen to other comments and think about the issue. WRT yesterday’s post, I just kept reading the comments and learn. I didn’t need to add anything. 🙂
doesn’t stop me. 🙂
I think I’m still contemplating running for office in another 20 years in this country. So for now I try to keep the number of stupid things I say to a little as I possibly can. If i ever abandon that plan then……………………
It’s a GORGEOUS weekend in August.If we pasty pale people don’t go outside today, then when…..sent from my iPad…poolside!
So a venture partner is sort of a partner with training wheels.They can hang in the clubhouse but don’t learn the secret handshake.Assuming that the Venture Partner actually would like to become a full partner – how many deals do you think it takes?Or is it more a function of where the GP’s are with their main fund – and then the fund raising around the next one?
Not every VP wants to be a GPbut for those who do, one big exit might be enough
in my experience, VP’s have been former GP’s who are on their way out.they’re still on the boards of the portfolio companies they’ve backed, but they’re not actively investing on behalf of the firm anymore.and as former successful GP’s, some of the guys becoming VP’s now are turning to angel/seed stage deals – having built a great network, hopefully some brand name recognition from their former firm and broad experience from which to apply to new deals.
Whats the motivation for uber successful VC’s with great deal flow taking on a VP and splitting the carry with them on the deals they source (which the GP’s would probably have found anyway)?Could the management element of the deals not be taken care of through a decent salary from the 2% fee rather than making them junior partners in the fund?When you say you didn’t have room for a 3rd partner in the first fund was that because you were already fully invested or because you could handle all the portfolio management between the 2 of you and thus didn’t need to bring in extra hands and split the carry?
everybody has a different network. albert can source deals that brad and Ican’talso, you do need management bandwidth for investmentswe didn’t have room for a third partner because we could largely handle theload between usbut albert did end up running a few deals in our first fund and they havebeen good ones
What do you think is the impact of the new revolution in angel & super angel investors on Venture Partners. My initial thought was that there will be no more room for Venture partners as seed programs like techstars, ycombinator, angels etc are a more structured way to source deals now. And it is only going to get more and more organized.
satish – from my perspective, angels and super angels are having a larger impact on web-based start ups at the early stage. when you move to a latter stage or to sectors that are more capital intensive (hardware, cleantech, etc), angels are making less of an impact.more interestingly, there is an argument to be made that the revolution you speak of may ultimately make angels the most effective venture partners. an angel seeding a start up and then approaching their VC for a larger round might be a more effective model (or might already be the model that many VCs utilize).
I don’t think that’s true. Only one of our investments in each of our fundscame from an accelerator program
When I started out in the venture business after a successful entrepreneurial career, I was given a courtesy title as a “venture partner” by a couple of funds that I invested in and had economic interests in (fees and carry) for deal sourcing etc. I was asked by one of the esteemed faculty members at Wharton “what the heck does a venture partner title really mean”? So I did some research and found that the definition was all “over the place”. Fred, you have done a great job describing the situation. We have one situation now where someone we know is a “venture partner” at a large fund after having been a partner. We have NO idea how much influence he really has, we suspect it isnt much and that he was pushed out due to new fund being smaller etc.. One of our companies burned a substantial amount of time with him in a fundraise and then it just died. The “tell” in the situation was when he brought in someone else from the firm that one would have considered his “junior” at an earlier juncture in time (Senior associate).
This is the great thing about a community like this….of course you don’t remember me but on a Saturday afternoon I see a comment by somebody that I totally remember taking a great undergraduate class more than 20 years ago.If I remember right the business simulation software was around companies that sold beer……
Actually I do Phil, lets catch up some time, Looks like you are in Philly. We are very close to the M&T program at PENN.
Michael that’s really valuable experience you’ve shared. Wish I’d taken your class.The prospect of getting into bed with someone who (1) won’t be there in the a.m. to make me breakfast, and (2) may be carrying a variety of icky diseases in the form of misaligned objectives and conflicts of interest, well…it gives me the willies.Ewww!If I’m going to deal with obfuscation and alternative agendas and the prospect of getting dropped, why not do it with a strategic or as part of a corporate group, where at least they’ll pay me a salary for my headaches and dashed dreams.It’s so important to know who we’re doing business with.
Michael, I just realized someone suggested I reached out to you for MentorTech. My co-founder and I are Wharton alums.What’s the best way to reach you?
Fred, great stuff, thank you. Would you consider posting on how the end of a fund’s lifecycle can impact a company?
i will think about itit’s not an easy post because so much depends on the circumstances of the firm and the fund
Thank you, Fred. Thank you, Satish, for the link in the meantime.
William, Mark Suster addressed some part of your question in the post below:http://www.bothsidesoftheta…Hope that helps until Fred takes a swing at it. 🙂
Being a venture partner myself and having to explain the concept quite often, it is great to see that you picked this topic – will point people to your post going forward. Great choice, Fred!
Re: the EIR, I have to say I’ve scratched my head on that one. Fred or others perhaps you can enlighten me.How does an EIR bring value to the entrepreneur who believes in his/her deal, except for taking it away, or a source of market information they can apply to the deal they eventually will take on?Why would an entrepreneur want to bring a deal to the EIR? If the EIR isn’t personally interested in what you’re doing, then doesn’t that shut you out from the rest of the firm?Maybe I’m missing something, but it seems totally asymmetric. Logic tells me if you’re an entrepreneur and you actually believe in the company that you’re building, then don’t bark up that tree.Please explain!
i’m with youUSV does not do EIRsi don’t like that model
Are you opposed to the idea of an EIR in a deal making capacity, or could you see value in having someone in the firm who can serve in an advisory capacity to your portfolio and potentially move into one of the portfolios — let’s say one of your portfolio CEOs that had a highly successful exit and wanted to stay in the entrepreneurial mix rather than run a large company?
I’m just not into having a lot of people in our firm. Less is more to me
I see your point if the EIR is serving strictly in a role that involves bringing in a deal — but it seems like some VCs use the EIR as an internal advisor to the portfolio — like an OP at a private equity firm.Until now, I’ve always thought the EIR was a holding tank role to keep the person on tap for a future role within the portfolio, serving as an advisor in the meantime.
I used to think EIR was a dream job and specifically with that ‘holding tank’ feature. Seemed just perfect.But now as an entrepreneur it looks really different to me.VCs are financial investors, not holding companies. But as I think through the possible scenarios the dynamics start to play out like a corporate political battle.Perhaps the particular person who’s the EIR with my investor’s firm is the right person to address a need that I have. Maybe, but more likely not. Does he have the domain knowledge not only for my specific company but for that specific problem? And am I paying for this person?If I’m supposed to put this person on my payroll, then I deserve the opportunity to search the market for the best fit possible. If the person is free to me, that has it’s own dangers. If I’m not willing to pay then he’s not valuable to me, and if my investor is paying than his fiduciary responsibility is with my investor and not me.Or, was this person in the wings when I was invested in, waiting for me to screw up, so then he could swoop in and take his “rightful” position? Yikes…if that’s the expectation, then he and I are indeed at odds, and this is a firm I shouldn’t have taken money from in the first place, because they don’t believe in me.If it’s a short-term turnaround situation, I still may prefer to bring in an outside consultant with domain expertise and a fiduciary responsibility to me, because I’m paying. Someone that I trust, whom I chose.I’m sure there are edge cases where the “holding pen” EIR model works, but it feels to me like it needs to start with the portfolio company literally recruiting the EIR or analyst out of the VC because they’ve had such a great experience with the person….and certainly not one being imposed on me, the entrepreneur.But hey, maybe that’s just me!
Fred – Thanks for taking up my request and giving this is a thorough and thoughtful response (per usual).I think the venture partner structure is an interesting method for investment funds to engage individuals with particular domain expertise and reward them for their contributions.I believe this structure can be similarly beneficial for public market investors (especially ones with longer time horizons), although these type of arrangements are currently less prevalent.I would be interested to hear from any other venture partners out there about their experiences of what worked and didn’t work…
Fred, As always, very timely and useful information. And, as always, your post prompted additional questions. Care to elaborate on Advisory Committees in relation to Venture Partners, and distinctions between the two. I’m in the process of setting up my AC, and some have hinted they’d rather be VPs. I am hesitant to grant this. Your thoughts?Thanks.Michael LainePS – I’m a little late in responding to your earlier compliment. Was off the grid for a while.I am honored and surprised that you liked my “tuition” comment enough to post here: http://fredwilson.vc/post/8…I’m developing a book and software tool, about my experience working on NASA’s Space Elevator research team and “Building the Biggest Thing Ever” at LiftPort Group. So this concept of “tuition” has been rattling around my head for a while now.We made a lot of mistakes, and had a lot of successes – I think these can be translated to general business use. Tuition must be paid! Always.Thanks, I appreciate your notice and publication of my idea. Take care. [email protected] on Twitter.
an advisory committee is usually helpful for due diligence but they don’t get involved in sourcing and managing dealsventure partners are much more like general partners
Would you say that VPs typically have a finance background, or are they usually closer in experience and skill set to the executives at companies that their firms back?
But, what is the “typical” background of a SUCCESSFUL venture investor? I can point to many, many that I’d deem “successful” that are mainly finance vs. operational in experience. There is no perfect template, imo. Success in this and most other businesses are determined by the intangibles (drive, passion, inter-personal, etc.), imo. Fred, give us finance types a chance ; )
Huh, I had mistakenly lumped venture with general partners. Important distinction, thanks Fred.
You and me both, Mark.
Here are problems we would like to have:1. Liquidation preference on a $182M exit2. Carry split among VC partners and general partnersThis is the beauty of this blog. It nails everything from the sweat-shop-two-founders-startup in the basement to the money bags issues and fancy offices in the 40th floor.
the idea of working on the 40th floor creeps me outnever ever going to happen
My pop worked on the 51st floor in an AT&T office (rented space @ one astor plaza) 25 or so years back. I remember being a kid there for the xmas party and just staring out the windows at the tiny street below in awe.
There was only one year when I had my own desk — otherwise I was always traveling and what we call “hotelling” — you check into a kiosk and then your phone gets routed to a desk in the cubical farm, under flourescent lights, and then you carry over any files and supplies that you need. Needless to say, not a lot of office rapport. You basically hoped you’d be flown off somewhere else, ASAP. And usually we were, M-Th.Over time they switched the cubes to be ‘reverse fishbowl’ — where the partners’ office were in the core/interior of the building and the staff cubes on the perimeter, near the windows, so we could get natural light. These interior partners’ offices were all glass so they could get some natural light. Now we could watch them pick their noses and other great stuff. Woo-hoo!But that one year — I joined a team on the 42nd floor, with exterior cubes. A building on 44th/Sixth. We drew straws among a whole section…and I got the corner desk! OMG!!!It wasn’t something I ever wanted or cared about, but I have to say — the views were breathtaking. I’ll never forget it.And for once, I always knew if it was raining outside.
Hi Fred,Do funds work with VP abroad in order to increase their reach/network, or do they tend to partner (co-invest) with locally domiciled VC?
i don’t knowgood question
What’s the conventional wisdom on venture-funding husband/wife teams?I’ve heard generally it’s a no-go but that was just one data point.
i think the gotham gal and i would be a good combo
LOL — you already are!!Highly complementary skillsets that are proven to work great together.FYI if we ever convince USV to invest in our little thing, I want Gotham Gal on my board. 🙂
This sounds like a free agent model: What’s the benefit of using this model over staying as traditional as possible?
So I guess Andrew was on his way to being a USV venture partner if he hadn’t left? ;)I wonder if anyone has ever written in restrictions on the VC fund’s influence if the venture partner leaves the firm.
but without liking the comment you’re hurting my AndySwan batting average! 🙂
the real question is: what is Andy Swan hitting? A Ted Williams like .406?Edit: According to the community box’s algorithm, Andy Swan’s current AndySwan Batting Average™ is over 1.000.
I’m from a family of girls so I don’t know the hitting calculation, but in volleyball the calc is: (#kills-#errors)/#total_attemptsSo if that’s the formula, then I see two things happening:(1) there is no “error” number to outweigh kills, and (2) not every kill is created equal — more than one person can Like a single comment. So indeed Andy rises above 1.000.In any case Andy’s comment performance is superhuman.It is only appropriate at this juncture to subject him to random drug testing.Am I jealous? Hell, yeah! 🙂
no, andrew was on a more traditional career pathanalyst to associate to principal to partner to general partnerventure partners and EIRs are different
i’m not sure why you mentioned EIRs. Assuming a startup has multiple offers, it seems possible that a startup founder might try to write some protections into the investment deal if a venture partner leaves the firm. VC is still a fairly clubby, non-transparent industry, so an entrepreneur can’t easily “asses how likely they will be with that firm for the seven to ten years you are going to need from them.” As such, if I were in that situation, I’d try to write some provisions in the contract to protect myself.also, i was the next Andrew, and you didn’t even pick me to interview. Your loss. 😛
Not the next Andrew, the first Evan.
the new new thing!edit: the only person I’ve ever wanted to copy was Ronaldinho. Only with a better work ethic and diet.
Hard to do that
Almost finished reading Bussgang’s “Mastering the VC Game” — amazing how much this is reinforcing what I’m learning at AVC University. The VP is one of the roles that has seemed unclear to an outsider looking in — but seems I’m not the only one. Appreciate how you’ve once again made a concept accessible on multiple levels. Using Albert as an example really brought it home. It’s always good to have a reference point.
Heads up to the AVC community, Andy’s 10 Startup Commandment’s was a big hit on HackerNews (as a follow on to Fred’s tweet).One of the great things about HackerNews is the conversations that happen there. Really sharp hackerpreneurs. In response to Andy’s Cortez principle (burn the ships)4. ELIMINATE your personal “outs” (burn the ships that you would retreat in)Any option other than success must be taken off the table. When Cortez sought to defeat the Aztecs, the first thing he did was burn the 11 ships that brought his army to shore and declared that retreat was not just unacceptable, but IMPOSSIBLE. Imagine the difference in thinking that must have transpired….from “let’s see what these Aztecs are all about” to “we must win”.Having “something to fall back on” increases the odds that you will “fall back” by multiples. Instead, make sure that it will be painful to fail, and therefore that you will do everything in your power not to fail.In addition…does having “something to fall back on” make your relationship group more or less likely to invest in you? Exactly…everyone wants to invest in someone that feels the pain of a zero more than they will!One of the commenters responded with BATNA (Best Alternative to a Negotiated Agreement). Basically a method of negotiation where reducing your options rarely serves to benefit you in securing terms. If you’re desperate, you’ll accept extraordinary concessions to get some runway for your startup.
BATNA is the right tool when you’re negotiating with other people — suppliers, employees, customers, you name it.The “burn your ships” edict is to prevent you from negotiating with yourself.You need to commit 100% to your startup.
I think it’s applicable to finance negotiating. If you have no income or other work, investors may take it as a positive signal that you’re 100% committed. But it also makes you more pliable and desperate.Although the time cost of finding traction/market fit is unknown, the cost of building a functional prototype is <100 hours for most apps. The best folks can hack out prototypes over a couple of days of relentless work. That can be achieved relatively fast and/or cheap. Its the back and forth tweaking that takes a while. If you spend time building without acquiring proof of a market it’s highly unlikely to grow. I make this mistake all too often, but with social information visualizing it’s tricky.I could have quit my job last year and not gotten married and still failed to find potential markets (between Oct-May I worked only 32weeks at ~25-30hrs/week). Those hours were childs play to what I put into Victus Media.Can you imagine your family going without income while you try to find product market fit?
Great comment and prompt to clarify.When I say 100% I mean you can’t go back — you have to be dead-set on seeing it through.I think “burning ships” is somewhat in the eye of the beholder. There are also so many points where you burn stuff and can’t go back: announcing to people what you’re doing (so you take a reputational hit if you don’t), partnership agreement, cashing first investor check, releasing to market, PR.I have nothing against bootstrapping and moonlighting. I’m doing it too!
Oh just read a perfect example of bootstrapping, github. That team created a product and developed a fit while earning a living. I’m curious about their startup dayjobs though (another bootstrapped company I presume).more wordshttp://www.victusspiritus.com
I’m a big fan of 37 Signals.Like you I’ve been doing paid project/consulting work most of the time. It covers basic expenses and pay for the babysitter.”Burn your ships” cannot mean throw your kids or your wife overboard!
Fred, please encourage Albert to blog about his time as a venture partner 🙂
Great idea.I saw Albert speak twice. Really brilliant.Actually saw his wife speak too. Also brilliant.Hmmmm….I see a pattern.
Fred, Great Post. You really simplified the roles and responsibilities of a VC, General Partner, EIR. Thanks for bringing the clarity.
I’d be really interested in hearing more about the role of an EIR. It’s a title I see quite a bit, but I’m not sure if everybody necessarily knows the specifics of what it’s about.
Maybe we could arrange a Charlie O vs. Fred “EIR Smackdown” on the topic.We sell tickets. I’d pay money to see it!Proceeds go to support the pre-launch NYC startup of their choice.