The Partnership

I have worked in three venture capital firms in the thirty-six years I have been doing venture capital investing. They have all been small partnerships, between three and seven investing partners, where there is little to no hierarchy amount the partners.

There are many models out there for building and managing investment firms. They vary from a single partner to an organization structure that looks like a Fortune 500 company. There is no best way to structure an investment firm.

But for early-stage investing, I believe that the small flat partnership is the best structure if the goal is to produce high return on capital funds. Here are some reasons why this model is superior for early-stage investing:

• At the early stage, investors must bet on teams and ideas that have not been proven. The biggest winners almost always come from the investments that are the most controversial and “out there”. A small tight partnership where there is a lot of trust between the partners is a place where you can make a lot of these kinds of investments.
• Being a lead investor in a company you start working with when it is very young (sub 10 employees) and remain actively involved with until exit can take a decade or more of work. Staying aligned as a partnership on the company and supportive of it is hard to do but incredibly important if you want the best outcome. That is hard, if not impossible if the investing team is large, hierarchical, bureaucratic, and largely disengaged with the company.
• No single investor has the entire package. Not even the best investors out there. Trust me. I know this. Surrounding top investing talent with other top investors is a magical thing. Some have great deal instincts. Some have great networking skills. Some are great working with founders. Some have great financial minds. Some are great technical minds. Some see new markets before others. If you can put together a team that has all of this, they fill in each other’s gaps and everyone gets better. This describes the team we have at USV right now and it is a joy to work in a team like this.
• It is very hard to make an investment that will produce over a billion of proceeds. You need to get and keep double digit ownership and the company needs to be worth over $10bn at exit. I’ve made less than five of these in my career, over almost forty years. So if you want to produce a high return on capital fund, you have to raise a lot less than a billion. I think a quarter billion is probably where it starts getting really hard to produce a high return on capital fund. This means you need a small partnership and a small firm.

The key to all of this is partnership. Real partnership. A real partnership is where everyone is equal, not just in terms of economics (which is critical to sustaining this model), but also in terms of influence and stature. This is actually quite rare in the venture capital business. I see it in some other firms. But I don’t see it very frequently. The firms that have this are special places. They are special places to work at. And special partners to take capital from.