Danny Meyer wrote in his book, Setting the Table, that as Union Square Hospitality Group, which has always stayed rent-free in my my mind, they prioritize the following in the order of:
- The team
- The customers
- The community
- The suppliers
- The investors
And I’ve always thought that was an interesting stack ranking of the stakeholders in the business. Which oddly enough, until recently, I hadn’t thought about it for the fund business. A friend asked me a simple question the other day: “If a GP wants my time versus an LP wants my time, and I only have time for one phone call in the moment, who would I prioritize?”
Now before I answer that question, a few things:
- The suppliers and the investors in a venture fund are effectively the same thing. Your LPs.
- You can probably argue that service providers sit somewhere in this totem pole, but if we’re getting into the details of who a GP is collaborating or spending time with, we can also include parents, spouse/family, friends, and so on.
- So, for the sake of this thought experiment, there are four primary stakeholders: team, customers, community, and investors.
Because I’m spending a lot of time with fund-of-funds these days, let’s also take this from the perspective of a FoF GP. (Although you can draw many analogies between a venture GP and a FoF GP). You have the team, your GPs, the community, and, your LPs.
Under the assumption that the FoF is designed as a financial vehicle than a strategic vehicle, I believe the ranking is:
team > GPs > LPs > community
GPs are a higher priority than LPs since without the GPs the LPs don’t make their money back. The GPs must outperform to deliver value to the LPs. How much help the best GPs need is debatable. But if your GPs ask for a service at the same time an LP does, then my belief the priority goes to the GPs.
Now, the more debatable point is that I believe the team should be prioritized over the GPs. Now this is also assuming that you have a team, and you’re not a solo enterprise (or a small, small partnership) yourself. Ideally, the team’s lifetime value (LTV) outlasts a GP’s LTV. I’d much rather be in business with the right team much longer than I imagine a FoF will be involved with a GP who usually graduates from the portfolio once they become obvious. Yes, there are edge cases, but I’m not here to debate the edge cases. The team’s value spans across fund vehicles. The GPs’ are only within the vehicle we invest in. As such, empowering your team members should be paramount. Set them up for success. Set them up to run their own initiatives and eventually lead the firm. But hire slowly, and fire quickly.
And lastly, your LPs are more important than the community. I am a believer in a rising tide raises all ships (after all, it’s why I’m writing blogposts like this), but I know not everyone believes in that. In fact, I’ve actually gotten in fervent debates with very successful investors who believe insight and information is proprietary. If you can’t serve your LPs well, no matter how great of a brand you have, no matter how much content you produce for the ecosystem, no matter how many speaking engagements, dinners, happy hours, and so on you host, you have a leaky bucket. Arguably a sinking enterprise. Your job as a business owner to create enduring and growing value for your shareholders. Your job as a charity or a foundation is to support the community first and foremost. That said, it doesn’t mean you throw the community out of the window.
In fact, the primary takeaway from all of this is that you always need to start from the lowest rung of the ladder. And that’s the community. To borrow Brian Chesky’s 11-Star Experience framework, at the base of this hierarchy, you need to already deliver a 6-out-of-5-star experience. You need to already go above and beyond for them. If everyone else is hosting happy hours already, you’re doing dinners where every diner gets a handwritten card from you about why they should be at the table. If everyone else has a Whatsapp community where they’re just adding people to a like-minded group, your community should have chapter leads that champion different topics and niche communities and be incentivized to host.
Only after that, do you deliver a 7-out-of-5-star experience for your LPs. 8-out-of-5-star experience for your investments (GPs or founders). and 9-out-of-5-stars for your team.
This is slightly different, though still similarly true, for fund-of-funds than with venture funds, but people often forget that venture is a financial services business. They get the finance part, but they forget the services part. Venture capital as a whole is an asset class, although arguable more than just one asset class. But emerging managers, via a fund-of-funds, is an access class. Implied in access, is providing access to people. Your LPs. Your GPs. Innovation. Insight.
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.