With its impact on hiring practices, talent development, and organizational prosperity, succession planning is an indispensable element in shaping an organization’s future. Suzanne Heske, Head of SPMB’s Investment practice, shares her insights around succession strategies based on her and her team’s experience partnering with hundreds of investment managers as they future-proof their leadership and organization. While she reinforces the significance of prioritizing succession planning for organizations at all stages of growth and maturity, Suzanne also suggests taking action sooner than one may think.
Part 1: Succession Challenges
What’s the Problem?
When it comes time to step away or to plan for a transition, LPs are asking for and monitoring future succession planning to ensure the protection of their investments and to mitigate “key person” risk. We most commonly see investment firms with a single founder (or two founders) experience succession challenges more frequently than firms with multiple leaders. Usually founders operate as both Managing Partners and CEOs; this creates particular difficulties when they move on at both firm and investment levels. If the founder(s) also serves as Head of the Investment Committee (in a formal or informal capacity), the investment team and portfolio may feel a gap when s/he moves on.
Succession Strategies: Options To Consider
What is an investment firm to do when faced with this organizational challenge?
Option A:
Convert an existing GP to a Chief Investment Officer and hire/promote another GP to function as the CEO/Managing Partner of the firm.
- We see the creation of a Co-CEO function to ensure a transition that occurs steadily over the years while founders are still engaged (actively or somewhat actively).
Option B:
Implement Co-Managing Partners/GPs that oversee different products/strategies or geographies.
- For crossover funds, for example, we have seen a Managing Partner, Privates, and a Managing Partner, Public Investing, who oversee different strategies.
Option C:
Promote/hire an ex-operator to lead the company and function as an Investment Partner while also promoting/hiring a sitting investor to interact with the LPs and provide business continuity.
Regardless of the direction a firm takes, leadership assessment is critical. For investment managers, the following are key criteria to assess when assigning future roles and responsibilities…
Leadership Assessment — Key Criteria
Investment Criteria/LP Relationships:
- Does s/he have exposure and a history of fundraising and interfacing with LPs?
- What is the demonstrated deal history/performance of this future leader?
- Does s/he have realized returns versus paper markups?
- Does this person have demonstrated deal flow, relationships with operators and founders, and networks with co-investors?
External Facing:
- Could this person be the external face of the organization?
- Is this person considered a thought leader in his/her ecosystem?
- Does s/he possess the gravitas to “replace” an existing GP(s)?
- Do founders, investors, and operators generally champion around her/him?
Internal Facing:
- Is this person a “culture carrier” of the existing organization and can s/he inspire employees?
- Does this person have the skills to be an “operator” within the organization?
- Does s/he have prior operating experience?
Culture:
- Define existing culture — what drives decision making and leadership outside of superior fund performance?
- How do people relate to each other to maximize investment outcomes? Is this key to future success?
- What are preferred relationship and engagement levels with LPs?
- How do we train, mentor, and promote employees?
- People philosophy: do we hire “up-and-comers,” or proven executors?
- Diversity initiatives: including hiring ex-operators, founders
Part 2: How to Succession-Proof
A winning leadership strategy demands careful implementation. Here are the elements that are critical for success.
Successful Implementation
- Ensure Founder/Managing Partner/Senior Executive owns the plan and has a genuine interest in turning over leadership to ensure a legacy once s/he has departed
- Identify or create a “key functions/roles” map
- Assess current employees’/team’s skills
- Arrange internal training or external coaching to develop internal talent
- Hire externally to backfill missing skills at the leadership level
- Confirm LP commitment to strategic plan and comfort with internal promotions and potential external hires
- Share succession plan with the next generation of leaders; communicate transparently about opportunities for their growth during transition and expectations around individual roles
- Review the plan annually to ensure it remains relevant and firm leadership is aware of any changes
Part 3: Other Considerations — Leadership Skills to Value
Another way to approach the leadership transition is to consider the key criteria and combined skills that will enable the next tranche of leaders to be successful.
Skills / Competencies →
- Deal flow, origination, lead generation
- Capital raising and partnering with LPs
- Investment track record: DPI/TVPI, number of deals, stage of investments
- Governance/Advisory work: Board member, board observer, impact with founders/CEOs to drive outcomes, perceived value add
Culture Fit →
- Interpersonal impact internally
- Thought leadership: internal and external
- Domain expertise: Sector knowledge, ex-operating company knowledge
- External network, syndicate relationships
- Firm operations knowledge
- Training, mentorship, advisory work internally and externally
Part 4: Where Are These People — Hiring Externally
Once you assess your current bench and decide to look externally for great talent, we suggest these five tips to hire right.
- People move for title promotion:
- Hire less tenured talent and invest in training, mentorship, and behavior modeling for more junior employees.
- Candidates want transparent paths to partnership and to GP/MP roles:
- Provide transparency around all internal promotion paths. Clearly define success metrics and hold people accountable to a shared internal culture and an outlined set of expectations.
- Operators are the ‘Golden Ticket’:
- Hire former operators with domain expertise and train them to invest. These candidates typically fail or succeed quickly.
- They usually make great board members as they can often relate to founders and use pattern recognition to drive growth and avoid pitfalls.
- Take inventory of your leadership team:
- Skills analysis – what will you need to backfill for first? Start there.
- Use assessment tools to identify and map skill gaps and prioritize in external hiring, beyond track record and domain knowledge.
- Always. Be. Hiring. (“ABH”)
- Consistently be in the market for great Principals. Hire opportunistically. This is the tightest pool of great talent and the most in demand.
- Perception: Larger firms train large classes and don’t promote them all to Partner. This is an opportunity for smaller firms to inherit disenchanted talent from bigger names, and for well-established funds that can show upward mobility to distinguish themselves.
- From a recent internal study, the average venture capital investment team composition resembles:
~29.2% = General Partner
~28.3% = Partner
~16.5% = Principal
~26.0% = Other
The data illustrates that venture capital firms tend to be top-heavy. Recruit at the Principal levels and allow investors to grow into positions of leadership at the firm and on the Investment Committee.
If your organization is in the process of succession planning and thinking about bolstering your team’s bench to better future-proof your leadership team, we would love to partner with you or share additional data points from our learnings.
To learn more about SPMB’s Investment practice — our team and our clients — visit us at www.spmb.com.
