These days I’ve been spending a lot of time thinking about succession and key person risks. Definitely influenced by a number of conversations I’ve had with a partnership I invested in who broke up and LPs who take the long-term perspective on investing in funds.
When I say long-term, I mean when those LPs invest in a firm, it’s not just a single check into one fund. They plan to budget out $XX million dollars over the next three funds or so. Or across 9-10 years primarily to invest in this fund manager. We’ve talked about how underwriting a solo GP is actually much easier than underwriting a partnership, at least on the key person risk side of things.
If a solo GP dies, they die, and the firm naturally cannot go on. And any capital reserved for them automatically goes towards net new investments. If a partnership loses a key partner, then it’s this awkward dance to figure out if the remaining partners are worth re-upping on. And a re-underwriting needs to occur.
Before I go any further, let me first define key person risk for the uninitiated. Key person risk is the risk created when a single person leaves or dies that creates meaningful knowledge, brand, or performance loss at the institution. Simply put, when shit hits the fan in a partnership, how volatile will the transition be?
As such, my recent conversations informs much of what I write below. For the purpose of this blogpost, I’ll focus on partnerships as opposed to solo GPs and founders.
All great relationships are battle tested. Battle-hardened. In fact, when I ask a set of co-founders how they resolve disagreements, and they say, they never disagree, I run in the opposite direction fast. So fast that I could be cast as Barry Allen. Maybe. If my acting were better. If two people never disagree, they’re either the same person (which is hard, ’cause even biological twins disagree) or they’ve never truly worked on something together that they would call their life’s purpose.
To me, the formula for battle-hardened relationships has two key variables.
- Depth – High stakes
- Breadth – Time for the stakes to manifest
High stakes
Even if artificially high stakes. Even if in the moment, all parties involved must truly believe that this is the be all, end all. That there is no Plan B. There’s no going back. That everyone has to see it through. In Hollywood, I believe it’s called the inciting incident. A clear market in time that after a set of events that there is no way one can go back to their old life. Whether it’s the state championships for a sport among high school students, or fighting for survival in the middle of nowhere. For artificially high stakes, one must distort the reality, so that at the minimum they must convince themselves of the gravity of the situation.
Why do high stakes matter? Because only then does one put their all into something. And when you truly care, you hold nothing back. High stakes reveals the character you are. If people can accept and embrace you at your worst, everything else is a cherry on top.
Time for the stakes to manifest
This varies for different people. Sometimes it takes time to care. Other times, it takes time to fully realize what’s at stake. And others still, may never get to that point of realization. For example, in a ball game with four quarters, sometimes it isn’t until the score is neck and neck in the fourth quarter do you give it your all.
In practice
So in practice, I love spending time with folks to talk about their past. Their origin story. And get into the weeds on key inflection points not only in their own lives, but also in the time they’ve gotten to know each other. When did they first work together? When did they realize they were more than just colleagues? At what point did they introduce their families to each other? What was the point of realization?
Most investors focus primarily on length of a relationship, which is definitely valuable information, but without depth, it’s easy to know someone for decades and care very little for their growth and success.
Photo by Kimson Doan on Unsplash
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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.