Headroom

How to tell if there will be room for you to move up in your firm

One question to consider when taking a venture role is whether it is “Partner Track”. Some firms might be pretty clear that there isn’t a path to Partner and others dangle the possibility of upward mobility quite prominently.

The reality is that the timeline to get to a true leadership role within a venture firm is usually 5 years or more. Most firms can’t really predict what is likely to happen over that length of time. Talking about partner or non-partner track positions give some sense of how the existing leadership feels about the headroom at the firm in the moment. But my recommendation is always to assume that things could quickly turn in either direction. I’ve seen a number of firms that very publicly proclaimed that they will never bring on new partners go on to launch new funds strategies with new senior people. And I’ve seen the opposite too. If you prove yourself to be indispensable, many firms will find a way to provide an upward path if there is headroom at the fund.

But how can you tell if there is headroom? I’d look at a couple things: AUM growth, Partner financial motivations, Partner capacity, and Partner longevity

AUM Growth: Elevating a team member to Partner means more responsibility for that person, but also more comp, and probably more dollars deployed by the firm overall. This realistically is only done in the context of expanding AUM.  The additional dollars need to come from somewhere. Specifically, you should think about this in terms of dollars per partner. Is it expanding or at least staying the same? If it is, there is upward mobility. But if not, there probably isn’t.

You can also look historically to see what direction the size of funds have been going. If the firm has been expanding quickly, it means there is likely headroom, although it might also mean that there is meaningful risk of strategy creep.  If the firm is growing more slowly, that might mean that the Partners are being disciplined and sticking to their strategy, but also that there is limited headroom. The funding market also plays a role, so pay attention to the performance of the fund as well as the performance of venture overall. In a strong market, firms can attract more money to expand AUM and thus make room for new partners. In a weak market, new partner roles are harder to come by because AUM is not expanding.

Partner Financial Motivations: Especially for newer funds, the relative wealth and success of the existing partners might have an impact on how wiling they might be to share.  Remember that promoting someone to Partner is literally cash and carry out of the existing Partners’ pockets.  Every promotion decision is a bet that giving up personal economics will result in greater overall economics down the road. So if the Partners at your firm are still trying to “make it” professionally, it might be a tough sacrifice to start sharing the wealth early on, even if it might be the smart thing to do with a longer term perspective.  

That said, some partnerships will defy expectations. Some VC’s will hoard economics and control for a long long time, which might make them very wealthy, but will probably lead to the eventual downfall of the firm.  And some Partners are principled about sharing the wealth or establishing a very flat leadership structure, even if they are still in their earlier wealth creation years. It’s helpful to know what kind of a culture you are in.

Partner Capacity: Capacity is the bandwidth that partners have to make and manage new investments.  This actually can swing quite a bit from time to time and firm to firm.  One big driver will be a firm’s investment model. Firms that take board seats that they hang on to for the life of a company will usually max out at about 8-10 boards per partner.  So if most of the partnership is getting close to this number, that suggests that there will be some pressure to add new senior team members to lead new deals going forward. Ironically, firms that don’t lead and don’t take board seats might be able to expand their portfolios dramatically without also expanding team size. Firms with this sort of model have a high throughput, and the same team can maintain their new deal volume without adding new partners.

Partner Longevity: Looking further down the road, partner longevity is another important consideration. The odd thing about VC is that it’s a job where senior folks could choose to hang on for a long time, but also one where partners also often step away quite abruptly. You may not be privy to these internal developments, but note the deal pace of the more senior partners over the last fund or two. Are they doing fewer and fewer deals? Do they seem to be slowing down overall? You can also look at SEC filings of most VC firms (as my partner Dave suggested in his last post) to see if some senior partners have stepped back from the most recent fund. Younger partners might also seem to be stagnating or struggling with a mediocre track record. Even though all it takes is one great investment to turn everything around, these partners might be pressured out of a firm or leave on their own volition to pursue something else.

While you can do many things to make yourself indispensable to your team and build your personal track record, you likely will have little influence on the factors that create or restrict headroom at your firm. Many of the factors above are tied to overall firm strategy, market timing, and the motivations of the senior partners at your firm.

The smart thing to do then is to try to be realistic about what the future looks like at your firm and plan accordingly. Think about maximizing your own personal market value as an early stage investor, and be aware of your firm’s fundraising timeline.  Most VC’s raise a new fund every 2-4 years, and they usually make the big decisions around fund economics 6-12 months before.  LPs focus on this quite a bit and don’t like it when firm leadership and economics are up in the air.  If you are a very strong performer, you will have maximum leverage around this time as LPs will notice if a fund’s rising star might become a flight risk due to lack of a promotion or economics.  While comp adjustments can be made year to year, the big personnel decisions get made fund to fund, so that’s the time when the rubber will meet the road for yourself, and for the other members of the team.