CAN THIS RELATIONSHIP BE SAVED?
By Constance Loizos
Nov 1, 2005
If you follow the venture industry, you've undoubtedly heard of VSP Capital, a San Francisco venture firm that imploded in late May after infighting prompted three of its five general partners to call it quits and LPs pulled the plug on the firm's three-month-old third fund.
The breakup was so acrimonious that some of the partners are now suing each other in San Francisco Superior Court, with allegations ranging from breach of fiduciary duty to lying to limited partners about an extramarital affair.
Given that VC firms are, by their nature, claustrophobic organizations filled with very bright, very opinionated, and, often, very arrogant people, it's surprising that more firms don't explode in a mushroom cloud of toxic animosity. "VC firms are like extended families, and often in extended families, there is an asshole or two who make it challenging for everyone else," says a Silicon Valley VC who asked not to be named.
Ah, but there's hope. Like many people looking to sort out the imbalanced relationships in their lives, VCs are increasingly turning to professional therapists and mediators to achieve the elusive objective of managing their internal struggles. These clubby capitalists haven't gone suddenly soft. They are on a self-improvement swing with no end in sight, thanks to their heightened appreciation that not addressing underlying tensions at one's firm can have far worse implications than seeking outside help.
The number of specialists who cater to the emotional lives of venture firms is evidence of the trend. Take psychologist Dick Strayer of Los Gatos, Calif. Four years ago, his Strayer Consulting Group "had four long-term venture relationships, where I was like a special limited partner in the firms," but that number has since grown to 35.
… Another big source of help for conflicts within venture firms is law firms. Though they may not have psychologists on staff to dive into troubled venture capital teams, the firms often refer clients to specialists, and many attorneys themselves are called on as trusted confidantes who can serve as objective mediators. For example, Cooley Godward has a venture capital practice that is specifically organized to give VC and private equity firms counsel in connection with fund-raising, governance and investment strategies-sometimes in the form of plain old business advice.
"We get called in all the time," says Craig Dauchy, a partner in Cooley Godward's office in Palo Alto, Calif., and head of its venture capital practice group. "We're very close to most of our fund clients and with most of the managing directors of those funds, so it's not at all unusual for them to say to us, We're having a problem over here. Can you please help?'" …
Do you need professional help?
Why should VCs, who are notorious penny pinchers, shell out big bucks for yet another expert? Well, say the consultants, most VC firms are terrible at diagnosing what's causing their problems and they don't have the aptitude to deal with them even if they figure out what's wrong. "The reality is that VCs aren't hired to be great venture firm managers ...They're there to raise money, invest it and return something to investors. It's a very different skill set." For example, a firm might say that its problem is that its partners can't agree on investments, but the real problem is that the firm never established a clear investment process.
Dauchy adds that VCs can be terrible communicators. "It's endemic to partnerships where you are working with people who are your equals," he says. "It's also difficult for some folks to speak candidly in that [VC] environment when they haven't grown up in it. A lot of these people have had careers where being non-partner-like has served them well." …
… OVP Venture Partners in Kirkland, Wash., has been working with Strayer since 1992, a relationship that general partner Gerry Langeler-who first worked with Strayer in his previous life at Mentor Graphics-calls both "challenging" and "wonderful."
Langeler says the partners at OVP "get Strayerized" twice a year as a group, and once every one to two years as individuals, when Strayer interviews not only the partnership, but portfolio CEOs and other VCs who sit on the boards with OVP partners. Strayer was especially helpful when the firm decided to part ways with two GPs in the past decade. "It wasn't a couple of us saying, We don't like the way you part your hair,'" Langeler says. Strayer helped the GPs in question to decide that they would be happier elsewhere, facilitating "more graceful" departures, Langeler notes. "We all have gaps, but [Strayer] helps everyone to understand when the gap is too large or it's not one that someone wants to bridge."
What's your problem?
The internal problems at VC firms most commonly involve disputes over (what else?) power and money. To a lesser extent, specialists are called in to try to repair personality conflicts. Says Dauchy of Cooley Godward: "You're talking about people who've excelled in their own worlds, be it finance or operations or even the newspaper industry. It's not shocking that when you have that many high achievers coming together to make decisions on a collegial basis that you run into trouble. In their past lives, a lot of VCs were used to having the last word, if you will, and it's sometimes difficult to reconcile that that's no longer the case when they come together into a partnership."
One frequent problem that arises with teams of similar people is an inability to openly discuss their concerns about their partners, such as when a member of the team isn't pulling his or her weight or is a lousy match. Says Strayer: "Sometimes our job is to help partners look at themselves honestly and at where they want to go. Are they the wrong fit because they aren't hungry enough? Do they have a personality where they aren't their most effective as a team player?" Strayer sighs empathically. "I mean, how do you tell someone that they aren't a fit, they don't have the right skill set, or that others don't agree with their investment process? It's one of the toughest challenges that firms face."
Ego is another sticky issue. Neal Dempsey, a managing general partner at Bay Partners in Cupertino, says that Bay's partners "resisted the shit" out of bringing in Strayer three years ago for an organizational development overhaul. "No one wants to be exposed,'" he says. "Everyone thinks [the process] is detrimental at first. What you come to realize is that it's a way to bring the dynamics of a partnership together in a dramatic way."
Dempsey is currently working with Strayer on a five-year "leadership-transition strategy," because he plans to retire from the partnership when its newest fund is fully committed.
In Dauchy's view, the healthiest partnerships tend to have a range of former top dogs. "Many firms are like microcosms of the [Silicon] Valley. There are quiet people, there are loud people, there are outgoing and shy people. Some partners are very aggressive while others aren't. From what I've seen, the best partnerships are where people are not all alike." …
… When Strayer and his peers are called in to solve a problem, the biggest bone of contention is who's in charge of a partnership and how much control he or she wields-which sometimes comes out as anger over other things. "While money is a measure, conflict is often about power: who has it and who doesn't …Those with the most power can sometime lose their ability to make good decisions, while the absence of power can create a sense of distrust."
Some of that struggle manifests itself in common complaints such as disparity in compensation, dissatisfaction around titles and perks, too few processes that guide decision-making, resource consumption (who flies first class and who gets stuck in coach?), too much or too little tolerance for risk, and how much time a partner puts in …
The methods that … Strayer employs are fairly straightforward. The first step: create an interview format that corresponds with whatever information the partners want to collect. For example, some firms are more interested in leadership transitions, while others might be more interested in improving communication style or business judgment or the diligence process.
Once the format is agreed upon, the mediators get to work, interviewing each partner on the list about themselves and their partners-sometimes with a delegate from the firm (like the managing partner or administrative partner). In all cases, the feedback is delivered to others in a way that protects the identities of those who have been interviewed, the consultants say. But don't expect mediators to use kid gloves. "Obviously, we want to be helpful and not damaging or insulting in the feedback process, but the whole point of the exercise is to provide real feedback," says Tirado of Strayer Consulting. "This is not a touchy-feely exercise. The point is to drive ROI."
Once the interviews are sewn up, the partners are given feedback about their strengths and areas they should consider addressing differently. More often than not, the partners share their insights with each other in a team-building session organized away from the firm's offices, where the partners can communicate their observations about what is working and what isn't, and what commitments need to be made for the betterment of the team …
… At the offsite, the team-building exercises and activities begin. "You go to the white board or big easel and write down on the left side things at which your partners are great and, on the right, what they need to work on," the managing partner says. "We've had exercises where people think for half an hour about everyone else's strengths and weakness and where they should spend more time and where they should be less focused."
It may sound hypersensitive, but those who have gone through the process say it works. A New York-based private equity manager who asked not to be named says he is a "die-hard" fan of outside mediation even though it can be a scary process. "Getting outside help isn't any fun while you're doing it. You're open …You're empowering everyone, and there's no place to hide." Still, he says, "I'll tell you, it feels really great when you all come out of the other side."
The managing partner of the Bay Area venture firm offers a similar sentiment: "You feel comforted by the fact that there's this great person facilitating, but at the same time, you're obviously anxious about what people have to say. If four of my partners say that I need to be more patient, for example, you kind of have to listen to that." …
Therapy? Not me!
That some firms spoke with VCJ on the record about reaching out for help is a testament to how far the notoriously discreet venture community has come. In fact, Langeler says that he has never shied from OVP's involvement with a psychologist, mostly because "this isn't let's get along and sing Kumbaya and find a way to comfortably have a beer together.' It's very objective-focused. This is about asking: What do you have to do better to be better in this business?" Dempsey of Bay Partners says it's "idiotic" to be quiet about the practice. "I get reference calls from a multitude of firms-early stage, late-stage-including really luminary firms. I think every firm should use this type of program to make itself better and stronger. Every firm has its issues. It's not personal. You don't talk about people's personal lives. You learn how to be more effective with your partners and your startups."
Yet the Bay Area VC firm and the New York private equity manager that spoke on condition of anonymity attest to the fact that asking for outside help can still be construed by as a sign that they are behind the game, not ahead of it.
"These are fragile entities, with people who have great reputations that they sure don't want spoiled," Strayer says. "It's even hard for us to introduce new [staff] to our clients. They need to know and trust you and know that other firms that they respect have used you to sort out their own issues."
Though some VCs themselves may feel embarrassed about seeking outside help, several LPs contacted by VCJ said they would much rather hear that a GP was tackling a partnership problem head on with the help of a professional rather than ignoring the problem and hoping it would go away. Edward Powers, managing director of Banc of America Capital Access Funds, a fund-of-funds manager based in Chicago, says that "reasonable due diligence asks what [VCs] do when things go wrong. As they move through funds two through 10, do they have the maturity to bring in an outside partner?" Powers adds that while "there are many healthy partnerships that can work these [issues] out on their own, we would also think very highly of funds that have the foresight to recognize that there could be a problem and that say, we might need to enlist the help of someone else to work this out."
Vanessa Indriolo, a principal at Cleveland-based Key Capital Corp., which dedicates 25% to 30% of its portfolio to mostly Midwestern venture capital firms, says: "I haven't come across a [venture] fund that has used [a mediator], but I think there are situations where outsiders can come in and address a deficiency. And from that perspective, I think it would be beneficial, both to the GPs and, frankly, to their LPs, who want to know that the firms in which they're investing are doing all the things that they said they would do."
What it will take for the stigma to disappear entirely is anyone's guess, but the venture industry's love affair with psychology looks to grow stronger before it abates. Though many firms began searching for help after the technology industry's collapse nearly five years ago, a growing number are continuing to seek out consultants, even in these much better times. Fact is, there is a lot happening right now: founders wanting to retire instead of signing up for another 10 years; younger partners who haven't had a big hit yet and are growing nervous; partners chomping at the bit to pursue new strategies or markets, like China, while others want to stay the course.
Firms are also confronting much higher standards on the part of LPs. Nearly everyone who contributed to this story remarked about institutional investors who are scrutinizing their GPs more ardently than in the past, including by handing them questionnaires during fund-raising that ask about the nature a firm's interpersonal relationships. "The level of due diligence [conducted by LPs] is three to five times what it was a few years ago," Strayer says, noting that a "top fund-of-funds firm did more than 100 reference checks" on one of his clients recently, including calls to the venture firm's past and present CEOs and dozens of people who had worked as board members with its team. "It was exhaustive. That never would have happened before."
Finally, it's become clear that brushing issues under a rug might hide those issues temporarily, but they will resurface, and they will be bigger and messier when they do. One look at VSP Capital is all you need as proof.