Field Notes: Generational Firms

Building a generational firm is not for the faint of heart. A firm's ability to exist beyond it's original founding partners with persistent performance and both a consistent founder and LP experience is extremely hard to do. Sequoia's status as the best of the best stems from their ability to do this consistently well since Don Valentine founded the firm in 1972. By my count, they've navigated generational change three times. In speaking to several GPs and LPs, the successes is attributed to Sequoia's "ruthlessness" around talent. It's not to say that there aren't transitional pains but from someone looking from the outside-in, they're managed in a manner that supports consistent sourcing, selection, and stewardship of investments and the firm.

This pondering stems from last week's news from The Foundry Group that their 2022 will be their last fund. I didn't expect the news to trigger some visceral negative reactions from some folks in my peer group. One person likened it to selling a home but then tearing it down before closing it with the buyer. Another suggested that the upcoming generation of VCs and founders have been let down because of the lack of generational transfer from a stalwart of the industry. I'll be the first to say that Brad Feld, et al have done more for the venture ecosystem than most others by mentoring and supporting an entire cohort of managers.

The social pressures of VC are interesting and definitely makes generational firms the default. I believe it takes greater emotional and intellectual awareness to go against the grain and realize that one does NOT want to build a generational firm. Why wouldn't someone want to build a generational firm? I'd guess a few things:

• Not wanting to manage people - talent is at the core of generational transfer
• Having "enough" personal financial success
• A personal legacy doesn't matter
• Not having fun
• Feeling the job is done

I'd also note that it's hard to ignore a lack of performance even with the original team. It's ok to stop when on top.

While it's difficult to lay data to this claim - I suspect that natural attrition of long standing firms is healthy for the VC ecosystem (maybe not necessarily founders who lose an option/source of capital). It makes room for the next generation of VC firms (LPs won't have a longstanding relationship to re-up on).

It will be interesting to see whether this news spurs a deeper gut check amongst GPs. In a market typified by challenging fundraising conditions and limited liquidity outlets, I wouldn't be surprised to see other firms call it and run off their existing portfolios in the coming years.