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.