Succession in Venture Capital is a 3-Legged Stool

The three necessary conditions for a successful transition are hard to get right.

This year I’ve spent some time talking to more experienced GPs and founders of venture firms about the things I should start thinking about now that I have a few funds under my belt. I’ve been very interested in learning more about how these folks think about generational transition and succession plans for their firms. This is not an immediate concern of mine, but it is a part of the business where I feel like I have something to learn from people who have been down this road before.

The generational transition question is not unique to the venture capital industry; it’s an issue in private equity, venture capital, hedge funds, and any other partnership business with outside stakeholders who provide investment capital. The venture industry has examples where generational succession and transition have gone well and examples where it hasn’t. A successful transition seems to require three things, all of which are necessary:

• The current leadership team needs to find a leadership team or individual they believe can take over the firm and continue to generate similar or greater returns.

• The limited partners who back the firm have to believe the chosen successor is capable of taking over the firm and continuing to generate returns that meet their expectations.

• The chosen successor has to believe that staying at the firm and taking over is an attractive option relative to the other things available to that person.

The best analogy for this process is a 3-legged stool. If you remove any of the three conditions above, succession doesn’t work, and the stool isn’t stable. In talking to more experienced folks who have navigated this process, I was surprised at just how hard it is to get all three of those conditions to line up at the right time. In many cases, the firm's leadership felt they had met two conditions but not all three. And, unfortunately, all three are necessary.

In particular, the explosion in new fund formation in the past decade has made that third bullet point particularly challenging to navigate. As things continue to tighten in the venture fundraising environment, I wonder if that will change the dynamic around succession conversations.