“Does it matter how my VC structures his own firm internally? Why should I care whether he’s doing all the work or whether he’s delegating it to junior staff?”
When you see the picture below, what’s your first thought?
“Org chart,” right? The above “pyramidal” organization structure – in which the senior people at the top of the organization have a larger number of junior people working for them at progressive levels downward in the organization – is so pervasive that “pyramidal” and “organization chart” have become almost synonymous. In the typical organization, rather than doing all of the work themselves, senior people hire more junior people and delegate work to them, enabling the senior people to leverage their time. The junior people often focus on a subset of the organization’s overall work, building specialized skills in that subset. In short, hiring people and delegating to them makes the organization more efficient and more effective.
Almost a decade ago, during my MBA era, I worked as a junior employee at a VC firm here in Boston. My first morning at the firm, I walked into the office, looked around, and realized that the four general partners who had started the firm in the mid-1980s had gone more than a decade before hiring any junior people (analysts, associates, principals, etc.) to help them. As the summer progressed, I saw that my firm was not alone; although there were some exceptions, many of our peer VC firms had a similar top-heavy structure.
This sparked a question: If a pyramidal structure is effective (and pervasive) in non-VC organizations, why do many VC firms avoid it?
When I started my PhD program, I looked to the academic literature for some answers. I quickly found that past research on venture capital (produced by academics at HBS, Stanford, University of Chicago, and other schools) had focused on the VC’s role as capital provider or “financier,” to the exclusion of any attention to VCs’ internal organization-building decisions — what I ended up calling the decisions made by “The Venture Capitalist as Entrepreneur.” (I did find some research that suggested that the non-pyramidal structure did exist at some point in other professional-services industries.) And yet, as I had seen during my time in VC, VCs’ internal decisions can have fundamental implications for how well those VCs perform as capital providers, and for the level and type of support they can provide to their portfolio companies.
For my dissertation, I focused on these “inside VC” issues, trying to understand and analyze how VCs make their own decisions about how to structure and build their own firms, and whether those choices had important implications for them and their portfolio companies. The core paper from the dissertation is forthcoming in Organization Science (no, academic journals do not operate on Internet time :->). Given my recurring theme (e.g., here and here) about the importance for founders of understanding what goes on within their VCs’ firms, it’s time to discuss that research. In my next series of posts, I’ll outline my findings and their implications.
In the meantime, though, I would love to hear from founders and VCs:
- Why did your VC firms adopt a non-pyramidal structure?
- What are the pros and cons of having such a structure?
- From your experiences, are there tasks that non-pyramidal firms can do better than pyramidal ones, and ones they do worse?