Upside-down VCs, Part 3: Synthesis of Comments

Why do later-stage VC firms have more use for junior hires than do early-stage VC firms?

Thank you again to all of the people who contributed comments to my query about junior hires in early-stage versus later-stage firms. As a whole, the comments highlighted most of the major differences between those firms; in this post, I’ll summarize them and extend them to career questions.

Breaking down the factors by the three major stages of the VC-investment process, we see important differences across all three stages: deal flow, deal making, and post-deal support for portfolio companies.

1. Deal flow — Amir highlighted the centrality of reputation and relationships in being able to tap into early-stage deal flows, in contrast to the “outbound calling” (or, using Eric Olson’s term, “smiling and dialing”) that may be more common with later-stage deal flow.
2. Deal making — Amir also highlighted the premium on “instinct” and judgment in early-stage deals, wherein GPs need to have a gut-level feel for the emerging market’s evolution and the unproven team’s potential to execute. According to him, later-stage deals have more of a concrete emphasis on financial modeling and financial knowledge, skills more common in junior people who may lack “gut level” intuition.
3. Post-deal support — An anonymous commenter suggested that in early-stage investing, founders (and the incomplete management teams typically found in early-stage ventures) need guidance from “seasoned investors” about such high-level issues as strategic direction and “executive” issues. Sroemerman added that senior people are better at providing such “real world” guidance to managers in unstable early-stage companies. In contrast, the “full management teams” in later-stage, revenue-earning ventures do not need such guidance, and may be able to benefit (in Sroemerman’s terms) from the “theoretical” knowledge of more junior people.

Three other, more general, factors were also suggested.

• Training — Tali Rapaport emphasized the longer feedback loops (or, the lack of interim milestones) in early-stage investing. Young ventures have longer horizons until success or failure is evident. Because of this, it takes a lot longer to train junior staff, and thus it may be harder for early-stage investors to see the gains from hiring them.
• Fund economics: Fees for salaries — Echoing some of the early comments to my first post, an anonymous commenter attributed some of the differences to the fact that later stage investors tend to have much larger funds, providing them with more management fees to pay junior people.
• Different mix of people — Furqan also pointed to differing uses of “fractional people” (such as venture partners and other part-timers) who are often used as substitutes for junior people. Such people enable senior GPs to leverage their time in ways that may differ between early-stage and later-stage investors.

In an email exchange, an aspiring VC extended these points to encompass his own career worries. He wrote: “My conversations have universally pointed toward small and flat being a far better work environment/culture than the hierarchical structures. The resulting paradox is that I can’t work for a [early-stage] firm that values its flat structure as a source of competitive advantage because my very presence would disrupt the culture that I seek.” The question this suggests is, if early-stage firms have less of a need for (and less ability to train) junior people, how can aspiring VCs build the foundations for careers as early-stage investors?

This also ties in to the final set of findings from my paper. The most important implication is that early-stage firms may be harmed by hiring too many junior people (who have to be developed and managed by GPs, without those GPs getting concrete gains from spending their time doing so) while later-stage firms may be harmed by not hiring enough junior people (thus not enabling their senior people to leverage their time as effectively). In my next post, I’ll discuss my tests of these performance implications for the VC funds in my dataset.