The VC associate model is broken

By Josh Breinlinger , written on March 1, 2013

From The News Desk

I want to talk about the venture capital associate problem. Everyone knows about it, though few are willing to talk about it.

At a VC firm an associate's job is to bring in deal flow, to attract the best entrepreneurs and startups they can find. An associate will perform a good amount of due diligence on any deal, and it's important to build a strong relationship with them. A good associate can be the biggest champion for a company internally and help the entrepreneur navigate the deal process successfully.

But the best entrepreneurs are well-networked and typically scrappy. They don't waste time, and they fundraise well. They don't want to talk to associates – they want to go straight to the partners, who are the firm's decision makers.

And herein lies the "associate problem." Associates want to talk to entrepreneurs, but entrepreneurs don't want to talk to associates.

I've thought about this problem quite a bit since I dealt with it firsthand for a couple years here at Sigma. In fact, I started with Sigma as a Senior Associate in 2010 and am now a Venture Partner in our new fund with Sigma West.

Associates can be effective, but some things need to change about either their profile or the role he performs. Here are some thoughts about how things should be done differently:

Operational Experience: Currently, many of the VC associates out there are in their mid-20s and fresh out of an MBA program. I don't want to start an MBA debate here. The point is they usually lack any startup operational experience. Great entrepreneurs may not want to talk to some associates, but I'm sure they want to talk to any individuals with unique and valuable operational experience. Firms should hire associates with more startup experience so they are more appealing to top entrepreneurs.

This was my personal path. I started as an associate at 32 years old (an aging dinosaur). I possess unique knowledge from my time building up oDesk's marketplace. Founders in online labor, collaborative consumption, two-sided marketplaces, or crowdsourcing companies tell me they value my insight into the issues. I've had many founders tell me directly that the reason they took the meeting with me was because of my time at oDesk. So, I think that associates with more direct startup operational experience will generally be more effective than others.

A small checkbook: Currently most associates act as initial gatekeepers. They typically schedule follow-up meetings with a general partner for 10 to 20 percent of the companies they meet with. If associates were empowered to make some sort of decisions with the firm's money they would be more appealing to entrepreneurs. And I don't mean that associates should start making a ton of $25,000 bets here and there.

One of the risks of taking small checks from institutional investors is the signaling risk. If a big VC firm invested in your seed round, why isn't it leading your A round? But what if the firms contribute something else?

I think Polaris-funded Dogpatch Labs is an interesting model since it primarily provides free office space to qualified startups. There's no real signaling issue with Dogpatch companies, because it didn't invest cash, just office space (a different form of investment). Or perhaps associates could have a small accelerator or some sort of tech event to run. I think we should have associates get creative and come up with ways to find great companies with non-traditional investments. Maybe they'll launch something like StartupBus or run a new hackathon.

An Existing Network: There are people out there with large networks of successful entrepreneurs. They're phenomenal connectors of people. They may be tech journalists or event coordinators. They may be really charismatic. They may be alumni coordinators at Stanford. Who knows? But I think younger associates with vast networks could make for interesting and effective associates who would not suffer from the "associate problem" since there would be more inbound activity and less outbound.

Partner Track: It's well known that generally speaking associates aren't on the partner track. This is wrong. The penalty for hiring a bad general partner at a VC firm is massive. The penalty for firing a bad associate is relatively minor. In almost all other businesses, it's common for people to rise through the ranks. It's an effective strategy to integrate people into the culture, get a sense of their performance, and promote the best performers. I believe VC firms should view the associate / EIR / principal role as a testing ground for potential general partners. It's the old try before you buy trick. I don't fully understand why VCs don't follow the same path; maybe I haven't been around long enough. But if associates were more commonly on a general partner path, they would a) be more senior hires and b) have more credibility with startups.