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October 23, 2005

Accountability, Thy Name is VC?

The Jewish holidays are an interesting time of reflection and soul-searching.  One of the concepts I found myself mulling over this holiday season was the notion of accountability.  One of the most critical elements of Yom Kippur is to stand before G-d and be accountable for your actions of the past year.  Webster has a pretty simple definition for this word:  “having to answer for what was done”.  With the holidays behind us, I was thinking about the nature of VC accountability, a concept that can be subtle to understand, but critical for entrepreneurs to get their arms around.

For entrepreneurs, it’s really simple.  Every month, quarter and year, an operating executive is held accountable for results.  The VP of sales is accountable for revenue.  The VP of engineering is accountable for shipping products on time.  The VP of marketing is accountable for prioritizing sales and engineering resources, generating leads and providing superior positioning to the competition.   And the CEO is accountable for everything – revenue, expense and cash position – all as compared to the board-approved plan of record.  The consequences:  a nice bonus on the one extreme and preparing your resume on the other.

What about the VC?  What is the VC accountable for?  If posed that question, many entrepreneurs would smirk, roll their eyes and crack that VCs seem to be highly unaccountable creatures.  But that is a misguided view.  VCs are, in fact, highly accountable in two ways, and I would suggest a third as well.

First, VCs have to answer for their actions over a multi-year period to achieve what they are paid to achieve – make money.  Over some (typically long) period, how much money did they invest as compared to how much they returned?  The Limited Partner (“LP”, the VC’s investor) cares primarily about results.  After all, they, in turn, are accountable to their investment committees to make money, and so that accountability flows right to the VC.  Although the operating executive has a shorter time fuse, the VC is no less answerable for their performance and that performance is extremely measurable.

Second, VCs have to answer to their partners.  In a VC partnership, each VC is investing the money of their peers as well as theirs, and affecting the overall results of the fund.  And so while an LP may not hold a VC accountable for periods shorter than 6-10 years (the period after which fund performance is well-known), VCs are accountable to their partner every week at the partners meeting.  For 4-6 hours, the partners pour over their strategies for deploying the capital, high-priority projects and individual portfolios.  Every week, each individual VC must stand and deliver and demonstrate in front of their partners that they are on track to fulfill their obligation to their LPs to make money.

The third source of accountability is the one that is most often neglected – accountability to the portfolio company.  Some VCs take this very seriously.  When I was an entrepreneur, one of my VC investors shocked me when he said: “I’m simply a service provider – I work for you”.  It was a refreshing attitude that I’ve always taken to heart – good VCs are those that answer to the entrepreneurs.  What did they deliver in terms of value-add that month, quarter, year to their portfolio company?  I would recommend entrepreneurs not be shy about holding their VCs accountable.  Just as the board of directors evaluates the CEO/entrepreneur every year for their performance against results, the CEO/entrepreneur should have the license to evaluate their VCs for their performance.  Who did they help recruit?  What business development introductions did they make?  Were they proactive in giving critical strategic advice?  Were they available and responsive when needed for emergency issues?

No harm in a little extra accountability for VCs, don’t you think?


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Well, accountability would be nice, sure-- but it also implies some sort of consequence for failure. What is the entrepreneur's option when the VC isn't doing much for him? You can't really fire the guy with the money.

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