Vision and fundraising are more important skills for chief executives today, according to a study of venture capital-backed company leadership by executive search consulting firm Spencer Stuart and the National Venture Capital Association.
Vision ranked fourth among important chief executive skills in 2010, but only seventh in the 2001 study. Fundraising ranked fifth in 2010 up from eighth in 2001.
Both results reflect shifting priorities in an environment where both raising funds and the path to liquidity have become more challenging for VC-backed companies.
People remain paramount. In both the 2001 and 2010 studies, venture capitalists considered the strength of the management team as the most important factor in deciding whether to fund a venture, followed by market sector. Proprietary product or service and business model both trailed slightly behind market sector.
Venture capitalists favour proven venture-backed chief executive talent. When seeking talent for emerging sectors (such as clean technology) with a limited chief executive pool, 2010 survey respondents clearly favoured proven venture-backed chief executives from unrelated sectors (58 per cent) over sector entrepreneurs with no chief executive experience (31 per cent) or industry leaders from large companies who lack experience in an entrepreneurial environment (11 per cent).
Venture capital-backed chief executives earn more than they did ten years ago. Forty seven per cent of respondents said that they are paying chief executives greater cash compensation and granting more equity. Venture capitalists say this is because of the longer-term nature of the role today and because today’s chief executive roles require executives with a broader skill set.
Venture capitalists are recruiting more independent board members. Seventy five per cent of those surveyed said they are recruiting more independent/outside board members now that they face a longer path to liquidity.
Investors are growing more confident in their executive assessment practices. Only four in ten venture professionals in 2001 agreed that their firms recruit the best talent, consistently and thoroughly assess management teams and remove low performers quickly. In 2010, 84 per cent agreed that their firms recruit the best talent, 63 per cent agreed that they consistently and thoroughly assess management teams, and 67 per cent agreed that they remove low-performing chief executives from portfolio companies quickly.
Yet opportunities exist for venture capital firms to assess management in a more rigorous, ongoing way. While 2010 respondents are diligent about assessing the management team before investment, only 25 per cent agreed that they conduct formal, ongoing management assessments after the hire. In part, this is because venture capitalists feel that they already link the chief executive’s goals and accomplishments to their compensation structure.
"The challenging exit market has changed the role of top executives at venture-backed companies, as different skills are required during various stage of company growth," says NVCA president Mark Heesen (pictured). "Today’s venture-backed chief executives will need leadership skills that address a longer runway to liquidity, creating a need for a more systematic performance evaluation over time."
The study also revealed that these longer timeframes to liquidity are spurring venture capitalists to develop boards of directors that more closely resemble those of public companies, with more independent directors brought on for specific expertise that strategically complements the rest of the board.
"As they strive to build their next generation of game-changing companies, venture capitalists are starting to take a more scientific approach to recruiting and assessing chief executives and directors," says Spencer Stuart consultant and study contributor Ben Holzemer. "As they face mounting challenges, firms also have a tremendous opportunity to become more successful in selecting the innovative, entrepreneurial leaders who can guide the industry profitably into the future."
