When A Key Man Leaves The Firm
There's a front page story in the NY Times today about Quadrangle Group. It's two stories in one. The first story is about Quadrangle's use of fundraising agents with political connections to assist them in raising capital from state pension funds. I don't know anything about that issue other than what I read in the paper so I can't really comment on that story.
The other story is about Steve Rattner's departure to join the Obama administration and help with the restructuring of the US auto industry. Steve is a founder of Quadrangle and is clearly what is known as a "key man".
In our firm, my partner Brad and I are "key men". If either of us were to leave our firm for any reason, our investors would have the option of causing an early termination of the "investment period". Basically, our investors could decide to halt all new investments and put the firm into maintenance mode.
That is exactly what the investors in Quadrangle are now debating. Apparently they have until this friday to make that decision.
This happened to me and my partners in late 2000 when the sole investor in Flatiron Partners, JP Morgan Chase, decided it didn't want to be doing early stage Internet investing via the Flatiron partnership anymore. We went into maintenance mode and remain in it today. We still have a portfolio of five investments we are managing. It doesn't take much time anymore but for the first three years after that decision was made, it was a full time job just managing the portfolio.
I talked a bit about this during my InSITE talk a few weeks ago. Here's a short one minute clip from that talk where I addresses this issue. The clip keeps going but the relevant part ends at 8:10.
It's not often that a key man, like Steve Rattner, leaves a firm in the middle of a fund cycle. It is more common for the departure to happen at the start of a new fund cycle. One of the great venture capitalists of all time is Vinod Khosla, who now has his own venture firm, Khosla Ventures, but he is also still affiliated with his prior firm, Kleiner Perkins. At some point, I don't know the exact details, Vinod decided he did not want to be part of the team raising a new fund at Kleiner Perkins. But because he has obligations to his partners, investors, and portfolio companies, he will be involved with Kleiner Perkins for some time to come. That's typically how this kind of thing happens.
The biggest and best known venture firms may not have key man provisions in their fund documents. They may have gotten beyond the point when any one partner is critical to the firm's ability to manage a fund. But most smaller funds and newer funds are going to have these provisions and if a key man departs, for any reason, it can mean the end of the firm as an ongoing entity.
So if you are a VC or an entrepreneur, pick your partners wisely and make sure they are in it for the long haul. As I said in the InSITE talk, venture capital is a long term business and requires people who are patient and committed investors.