VCs need to get better at hiring

The industry starts and ends with the people working in it — nothing matters more. In this latest edition of the High Performance Venture Series, David Mott, Chair of the BVCA VC Committee, takes a look into how the market for talent is evolving, focusing on the key factors of hiring, developing and retaining diverse teams.

VCs are surprisingly bad at hiring. Firms are increasingly planning far ahead and asking themselves what their team needs to look like when they go out for the next fund. And the one after that. Maybe even the one after that. Inevitably there will be some turnover, but developing and retaining the best is an ongoing issue for many firms, however successful.

Ultimately, the industry starts and ends with the people working in it — nothing matters more in a VC firm or at your portfolio companies. Yet despite its clear importance to firm performance, it is an area which is curiously under-explored. In an effort to give this topic the spotlight it deserves, earlier this year the BVCA held an event to explore the talent challenges currently faced by the VC market and how we could improve our recruitment methods, how to develop our star performers, how to keep them, and the importance of having a diverse team in place, one with people from a range of different backgrounds and skill-sets.

Following the event, we have produced a short paper which outlines some of the key insights and recommendations that came up during the wide-ranging discussion.

A particularly interesting strand concerned how hiring pools have evolved. Head-hunters are constantly asked to present candidates with ‘five years’ experience and a strong track record’, but in a market where the number of firms is growing rapidly, the size of teams has doubled and fund sizes are increasing, there is a shortage of such candidates.

As a result, the demand for more diverse candidate shortlists is high, and alongside this the routes into venture capital have multiplied. It is no longer just the preserve of investment bankers and consultants, VCs are now hiring entrepreneurs, technologists and private equity executives with the experience of backing growth and building businesses.

Keeping the best

But once you’ve made the hire, then what? Whose responsibility is it to develop new talent? And will they simply lose them once they have reached the requisite level of experience to a higher bidder?

The answer is that we in the VC industry share a collective responsibility to develop the talent pool to make the UK’s venture and enterprise economies thrive in the future. As the sector matures and firms add greater depth to their teams, it will in turn become easier to train and develop other VCs.

Shadowing, mentoring, formal training, peer group networking are all important elements of a successful VC journey. More firms are gathering their teams for away days to dissect their deals and analyse their deals and to learn the lessons of successes and failures.

Moreover, there is a growing trend to recognise and reward team performance as opposed to the traditional emphasis (and often lionisation) of individual deal-doers. This does not mean individual performance is not important of course, but it does mean that there is a great awareness and appreciation of how different people work and what each team member brings to the table. Investment performance is not everything and there is a growing focus on other traits such as being a good ambassador, mentoring and leadership (both within the firm and externally).

It’s not all about carry

In developing your talent it is important to get the basics right — people want regular feedback, relationships that work and opportunities to be trained and developed. Consider also your ‘employer brand’: what does your firm stand for? What are you best known for? Do your values come across consistently? These questions can help stimulate internal discussion and form the outline of a long term talent strategy.

Retention strategies have historically been centred around carry allocations. Today, retaining talent is a function of multiple dynamics. There is huge pressure from talented investors to ‘make partner’ much earlier. There are more VCs carrying the title of ‘partner’ in their 20s and 30s than ever before, and not doing so is seen as a hindrance to securing credibility with entrepreneurs who are flooded with offers of funding. Others argue that to be a partner, you need to have experienced a major downturn and come out of it.

Carry is of course an important factor in why many work in this sector. But the incentive works differently for different levels of the talent pool. Insights from head-hunters indicates that at more junior levels, carry has a low perceived value as individuals often don’t see themselves in the same firm in five to 10 years, and at their stage of life more importance is placed on annual bonuses.

For senior investors and partners, carry plays a key role. But too much can also have a reverse effect and some firms have seen some of their best investors step back or out of the firm as they reach ‘their number’ and make lifestyle changes (such as retirement). Of course, this can provide an opportunity for others to rise up in their firms.

Other findings

Here are some more key trends identified at the event:

• There is fierce competition for talent as more VCs enter the market, driven by the increased availability of capital and by the demand from entrepreneurs in a tech market that has greater depth and breadth. The BVCA’s VC firm membership is up 150% since 2010.
• Funds are getting bigger, assets under management have grown, and this means the average size of VC teams has too. Some consolidation in the sector is also creating larger VC firms and funds.
• Deal activity has also increased in recent years and more experienced investors are needed to lead transactions and sit on boards.
• With the increased focus on seed investing by institutional funds, portfolio sizes have increased.
• Inflows and outflows: more private equity executives are looking to move into venture capital as compensation is now similar to buyouts. But there is a drain out of the industry as a number of VCs have left the sector to become founders of tech companies.
• The ten-year bull market means there is a generation of VCs and entrepreneurs who have not known a downturn. Dot.com bubble or the financial crisis are increasingly distant memories, but lessons must be remembered.

If you are interested learning more about the insights from a Talent for Performance, please email Chris Elphick at the BVCA to receive the report of the panel debate, or click here.

Thank you to all the contributors to this discussion:

David Mott, Oxford Capital, and Chair, BVCA VC Committee
Caroline Chayot, Atomico
Charlie Hunt and Gail McManus, Private Equity Recruitment
Tim Levett, NVM Private Equity
Calum Paterson, SEP
Pierre-Antoine de Sélancy, 17Capital
Tim Hames and Chris Elphick, BVCA

The next event of the High Performance Venture Series will be on 8 May and will shine a light on how to be a great investment director. Sign up here.

www.bvca.co.uk