Reflections On The Single Partner Model In Venture Capital

Reflections On The Single Partner Model In Venture Capital

I started Precursor Ventures as a solo general partner. When I was going through the process of starting the fund, I was really lucky to get a bunch of good feedback from other GPs who have been doing this longer than I have.

There are some GPs I really admire who pioneered solo GP micro VC models and have remained solo GP firms as they’ve had success and grown – Steve Anderson at BaselineManu Kumar at K9Michael Dearing at Harrison Metal are at the top of that list for me.

There is another class of GPs who started out as solo GPs who have built franchises that encompass multiple partners, including Jeff Clavier at Uncork CapitalMike Maples at FLOODGATERoger Ehrenberg at IA VenturesKirsten Green at ForerunnerAydin Senkut at Felicis Venturesand Aileen Lee at Cowboy Ventures to name a few.

And there is a new(ish) set of solo GPS who have been incredibly helpful to me, including Kent Goldman at Upside VenturesShruti Gandhi at Array VenturesTim Connors at PivotNorth and others. I can’t name everyone who has been helpful, so apologies in advance as this list is not complete.

venture capital
Charles Hudson, managing partner at Precursor Ventures, San Francisco, California, Sept. 15, 2016. Photo: Paul Sakuma Photography/paulsakuma.com/precursorvc.com/team/

I decided that the solo GP path was right for me and the goal for this post is to shed some light on why I think that was the right path for me when I started Precursor. This is not the right path for everyone, but it was (and has been) for me.

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I have really enjoyed meeting first-time fund managers in the last few years. Some of the people I’ve met are already on the path to raising their new funds and others are considering striking out on their own. Most of the first time fund managers I meet fall into one of three buckets:

  • High conviction that being a solo GP is the right move, no reservations but curious about the journey to getting the first fund closed.
  • Open to the idea of having a partner, but willing to start a fund alone and add a partner down the road if they find the right person.
  • Decidedly uncomfortable with the idea of starting solo, really want to start as part of a team.

If you fall into the third bucket, I’m not sure most of this will be relevant to you. But for folks in the other two groups, I hope this post gives you some things to think through on your journey.

If you’re pressed for time, I think most of the conversations around whether solo GP might be right for you comes down to how you answer a few core questions:

  • Do you want to build an institution that could live on beyond your career or are you comfortable building a firm that will exist for as long as you remain committed to investing?
  • Do you feel like you make better decisions when you have someone around to be a sounding board or do you prefer to make decisions on your own?
  • Are you willing to share control of economic and non-economic control of the way the fund works? By non-economic control, I mean things other than carried interest splits and other things that touch money. Are the firm’s personality, internal processes, branding, investment focus areas, decision-making up for debate between you and other people you might bring into the firm?

When I asked myself these questions, I tried really hard to answer them all honestly. Given the nature of these questions, there is a temptation to confuse how you actually feel with how you wish you felt or what you think the “right” answer to the questions above is. You’re signing up for a 15-to- 20-year journey; it’s best to build the type of firm that reflects who you are, not who you might wish you were.

I’d also like to point out that this is one area where starting a venture fund is different from starting a company. Even if you are a solo founder of a startup, you will most likely eventually hire more people to fill important roles in your company. As a solo GP, you might stay one core investing partner forever as you might not really need to add people to your firm at all.

With that context, I wanted to cover a few things that I think are worth considering if you’re contemplating the solo GP path.

Venture Capital is a Team Sport — But What Sport?

A lot of people say “venture capital is a team” sport and I think this is true. When people say this to me, what I hear them saying is venture investing works better when you have a team of people (as opposed to an individual) working together to evaluate companies and support them after you invest. This is certainly one way to invest and probably necessary if the goal is to build an institution that can outlive the founder.

However, the other thing that occurs to me when I hear the team sports metaphor is that not all team sports have the same dynamic. Golf and tennis are both team sports. But they are sports that are fundamentally about individual results that are pooled at the team level. Nobody can step in and make a putt for you or serve on your behalf. Soccer is a team sport and I’d argue that most soccer teams are as good as the weakest player on the team. So maybe soccer is on the other end of the spectrum in terms of team sports compared to golf and tennis.

These sports analogies are imperfect, but I do think they highlight an important thing to consider about starting a fund. It’s important to understand what “sport” you want to play. Do you want a team of equals? Do you want a fund led by a strong lead partner supported by others who are more like role players? Do you want a fund where every partner does his or her own thing and you pool performance (a pack of lone wolves)?

For what it’s worth, being a solo GP makes this moot. The solo GP model is obviously a poor choice for people who really want to be part of collaborative, interdependent teams.

Having a Single Decision Marker Simplifies Decision-Making and Reduces Deliberation

One of the biggest differences between solo GP and multi GP firms is how decisions get made. In solo GP firms you generally have one decision-marker who can say yes to an opportunity. In a multi GP firm, you have to negotiate how decisions are made. Do you want unanimous consent in order to make an investment? Or should the threshold be one advocate plus a supportive second? Or does each GP have discretion to do the investment that he or she likes unless there is vigorous descent?

When I started Precursor, I decided that I was comfortable writing checks of $100–250K to pre-seed companies without another GP to check my judgment or push back on my thinking before saying yes. For me, the logic was that companies at the pre-seed stage don’t have much data to analyze; you’re really investing in the founding team and their insights. I’m not sure how you have a vigorous debate on companies at the stage where I invest, but I know others differ in that dimension. At the stage where I invest, I decided that that simplicity of having a single decision-maker would simplify the firm and also allow us to move quicker. I would never a have a situation where I needed to wait for someone else in the firm to find or make time to meet an exciting entrepreneur. And, given the sums of money that we commit, I thought that speed and simplicity was more valuable than deliberation.

I think this is also why we don’t see many (if any) solo GP firms that lead Series A rounds. When you are talking about committing millions of dollars to a company that has an operating track record and data, I’m not convinced that the speed and simplicity of decision-making outweigh the benefits of the opportunity for deliberation and discussion among partners.

One other minor point. For better or worse, single GP funds don’t have any issues around GP attribution or track record. All of the investments, for better or worse, have a clear owner who sourced and worked on the investment.

For Some LPs, the Solo GP Model is a Non-Starter

Within the LP community, there are some LPs for whom solo GP funds are a non-starter. For some, I believe it’s driven by their belief that venture is a team sport and they want to back teams, not individuals. For others, I believe it’s driven by a concern that single GP funds are fragile — if the principal becomes incapacitated, decides not to raise another fund, or is otherwise unable or unwilling to continue to work on the fund, the fund is over. Last, I think some LPs don’t invest in single GP funds because they invest money on behalf of clients and worry about whether or not they can do right by their clients by investing in funds that are only a single GP.

I met many smart LPs who told me solo GP funds are a non-starter for them and I chose to take them at their word. It doesn’t really matter why they don’t like them at the end of the day; they’ve put some thought into why the model doesn’t work for them and I decided to just move on if it’s a threshold issue for them.

One difficult lesson I learned on the fundraising trail is that being wishy washy about whether you are a committed to having a solo GP fund or a single GP in search of a second partner really undermines your story and can make others feel like you don’t have clarity about your own model Things got easier once I got comfortable with my choice and decided to embrace it.

The good news is that there is a set of LPs out there who are very open to solo GP funds and have had good success backing them. Those of us who are earlier in our venture careers owe a deep debt of gratitude to the early solo GPs who blazed the trail and proved that the model can work.

Doesn’t It Get Lonely as a Solo GP?

This is probably the question I get most often. I now believe that it isn’t really one question, but rather a bundle of related questions which I’ll summarize below:

  • Don’t you miss having someone with whom you have an ongoing relationship where you look at companies together over time? I think this really speaks to the very human desire to have colleagues that you see on a regular basis and with whom you can build trust and rapport.
  • Don’t you sometimes get stuck and wish you had a sounding board to help you think through things when you get stuck? Starting a new fund is hard. What do you do when you get stuck on an issue where having a second perspective would be helpful?
  • How do you stay sane when you are fundraising and trying to build a brand new fund if you don’t have someone else there with you? Fundraising for a new fund is really hard — who is there to pick you up when you are down or to give you feedback on what isn’t working if you’re the only one in the room?

I have a pretty simple answer to all of these questions. If you are going to go the solo GP route, you will have to build a support system outside of your firm. I think every GP should have peers in the industry outside of their own firm that they can turn to for support, advice or perspective, but it’s absolutely essential in a solo GP firm.

This is one area where I think people spinning out from established venture firms or active angels have a real advantage over people who are coming to venture without connections or relationships. If you’ve been an investor of some sort before you venture out on your own, you should have some relationships from your previous investing activities that you can utilize when things get challenging.

This loneliness question isn’t something that really bothered me when I was getting started. I haven’t found being a solo GP to be lonely at all. We try to syndicate every investment that we do, so I feel like I am always talking to other investors about companies I’m seeing or trying to round up people to invest in companies where I’ve already committed. As a result, I end up having a different set of co-investors for every investment we make. Rather than having one or two partners with whom I work on every investment, I have a set of relationships I can tap depending on what the nature of the business, the personality of the founder, what I think he or she needs to be successful and a few other factors. I quite enjoy the ability to work with different combinations of co-investors on each investment we make.

Having worked in a multi GP partnership in the past, I can say that there is real value in working with the same people in a close way on multiple investments over time. You learn a lot about how they process information, what each person’s strengths and weaknesses are and you have more relationships and networks to tap when you are trying to assess an opportunity.

Most Solo GP Firms are Repeatable but Not Scalable

Whenever LPs ask me to describe Precursor, I tell them that it is a very repeatable model but not very scalable. I feel like our small team could continue to invest in 20–25 companies per year every year for a very long time. That works well for a relatively small (sub-$35 million) fund with a single investing GP. I don’t really know that what we do at Precursor would work if we tried to invest $50 million per fund with only one GP. I honestly think I’d make different investment decisions on the first check if the fund were larger. And I think there is some absolute limit to the amount of dollars that an early-stage, single GP fund can manage per fund. I don’t know what that number is, but I suspect it is somewhere between $75 and $100 million. This does not include money that might be deployed through SPVs, growth funds or other capital that is dedicated to following on to early investments.

Only you, as the GP who is starting his or her own fund, can answer the question around what you want to build. If your goal is to build a large, multi-partner institutional franchise, you might need to start with a smaller fund to prove the model. If that’s the case, the question of scalability versus repeatability isn’t that important as your goal is to prove what you do works and then raise more money to scale.

If your goal is to build a repeatable but not scalable fund, the calculus is different. I think you really need to think about what it means to run a smaller fund with lower management fees for the first 5–7 years of your fund and what that means for you personally and professionally. And whether that model is something you find interesting and attractive.

You Will Hit Capacity Constraints and Face Real Tough Choices

There’s no way to sugar coat this one. If you are a solo GP, you will hit some really tough patches where you will feel really stretched. It will probably never feel more acute then when you are trying to balance fundraising for your fund, supporting your existing portfolio companies and meeting new prospective investments. In a solo GP model, you are the only person who can do all three of those things and there will be times where the aforementioned things are in direct conflict. You will have moments where you feel overwhelmed, where you can’t balance all of those things and where it feels like you can’t do it all. You know what? It’s true. You can’t do all of those things well at the same time and there will be moments where you’ll consider whether you’d be better off having another GP who could help you load balance.

One of the advantages of solo GP is simplified decision-making. The flip side, though, is that your firm will only be able to move as quickly as you can. If you get backed up and busy, your entire firm will slow down — there’s no way to really solve that problem unless you find another person you trust to join your team and make decisions with some level of autonomy. There will be times where you will likely feel frustrated or overwhelmed by the number of disparate tasks that you need to tackle to keep your firm running, but that’s a feature, not a bug. If you decide to go the solo GP route, I expect that this will happen to you at some point.

I don’t have an elegant answer for this issue other than to say it will happen, you will face it and it will test your resolve.

Do You Want to Build an Institution that Lasts Longer than Your Career in Venture?

If your goal is to build an iconic venture capital franchise that lives on long after you retire, you clearly can’t do that if you have a long term commitment to a solo GP model.

If you really want to build an institution that will persist once you move on, I don’t think you can really do that with a long-term solo GP model. It’s okay to start off on your own, but the long-term viability of your firm will require that you recruit and retain the next generation of investing partners at your firm.

I don’t know what the future hold for Precursor. I didn’t start the firm thinking that I wanted to build an iconic institution that would live on way into the future, with more partners, people and infrastructure. I simply knew that I wanted to invest in really early-stage companies in way where I could align my smaller check size with what founders were looking to get.

Being a Solo GP Doesn’t Mean You Don’t Have Teammates

Just because you are a single GP firm doesn’t mean you don’t have other people on the team. At Precursor I am lucky to have Sydney Thomas on our team and to have had Lindsey Maule, Ethan Fassett and others work alongside us at the firm. We also have great support in terms of fund formation, fund administration, deal counsel and a strong LP advisory counsel. The fund and what we’re doing is bigger than just me and we wouldn’t succeed without the other folks who support us.

Starting As a Solo GP Doesn’t Mean You Have to Stay Solo GP

Last, you don’t have to end up where you start. If you start off as a solo GP and decide that it isn’t right for you, you want to build a more long-lasting institution, or you just want a different configuration then by all means change it. Just because you started as a solo GP at the beginning doesn’t mean you need to stay wedded to that decision.

I have learned a lot from talking to more experienced VCs who started off as solo GPs and built larger partnerships. In those conversations I have learned a lot about why they expanded and I would say the vast majority of them are glad they brought on more people, built out a more robust organization and wouldn’t go back to the solo GP era of their firm now that they’ve seen the other side.

At the same time, a number of the VCs I really admire have been solo GPs and are very happy, deeply committed to the model and have not plans to change. As a relatively young founding partner, it gives me great hope to know that there are people succeeding in both paths and that both can be a way forward for those of us who are still early in building out our firms.

This is to say that I think where you start need not be where you finish. Precursor is still a really young firm and we are finding our way on a lot of fronts, including team composition and how that will evolve over time.

If you’re a solo GP, aspiring solo GP or decidedly against doing venture as a solo partner, I’d love to hear your thoughts.

This article was originally published on Medium. It is reposted here with the permission of the author, Charles Hudson.