Earlier in my career I worked at a large private equity firm (in my view, one of the great ones: Bain Capital), and for the last 13+ years I’ve worked in early stage venture capital. Those two ways of investing, ie buyouts vs. early stage venture, have lodged in my mind the subtle distinction between power and influence.
As a general matter, private equity or buyout firms purchase 100% of their portfolio companies, while venture firms purchase minority positions (though over time and across syndicates, venture capital ownership in aggregate often exceeds 50%). In one sense, the difference between 25% ownership and 100% ownership is just a math difference, particularly when you consider the various “control provisions” many VCs put into their terms, in practice the difference in governance style is (or at least should be) radically different.
I was reminded of this distinction twice yesterday. The first was in a conversation with a search and HR consulting firm, whom I greatly respect. This particular firm works nearly exclusively with private equity funds, but in this case was interested in working with one of our portfolio companies. It slowly became obvious to me that the firm thought they were in my office to make the sale, ie, that I was positioned to decide to use them for a search at one of our portfolio companies. I hastened to make it clear to them that they were in the wrong office, and that the team at the company would make the decision, and at most I would have input, or influence. The second conversation was with an outside director candidate, where similarly I had to make it clear that while my opinion mattered, ultimately we were looking to the management team to lay out a strategy for building an effective board, with our guidance.
I would contrast this with the typical process at a private equity firm, where quite literally the management teams at the portfolio companies work for the private equity folks. That’s a fine arrangement, and probably appropriate for more mature companies, but that would be a terrible outcome for an entrepreneurial, venture-backed company. Any entrepreneur who wants a “boss”, in that sense, is probably not the right person to execute the kind of high risk, high growth innovation that is the underpinning of a successful venture.
The fact is, there is really no sense in which any of my CEOs work for me. From a user experience perspective, most of the time it presents as though I work for them … most of my job consists of helping them meet their objectives, rather than the other way around. (Though, of course, by helping them meet their objectives I sneakily achieve mine, which is to own good-sized chunks of valuable companies.)
While proudly acknowledging that I don’t have any real power, I do think in most cases I have a reasonably amount of influence. I guess, to paraphrase WHEN HARRY MET SALLY, I am the dog in the scenario above. Management teams clearly have the prerogative to go against any opinions I may have, and all of my good ones commonly do that. But it is the case that the stakes of doing so and consistently being wrong about it grow higher over time. Hopefully, in addition, I’ve gained some level of influence just by having a degree of credibility with regard to certain aspects of building companies in my lane (financial services industries).
Lest anyone read this as a venture capitalists currying favor with entrepreneurs (not that I’m above that…), I should admit that my strategy here isn’t just about being a good guy and empowering management teams as a value in and of itself. I do it because I think it’s more likely to make money. Ultimately, my view is that power and accountability go hand in hand. To the extent to which I, as a director and venture capital investor, am making decisions at or for one of my portfolio companies, I am taking on accountability for the outcomes. To the extent to which I take on accountability, I am removing it from the management team. My view is that accountability shared is accountability lost, and a lack of accountability is the first step on the road to ruin.