After taking a break for the holidays, I'm back at my series that attempts to share some lessons learned from the Sempre experience. See links at the bottom for previous entries. This entry is about building the team.
It's hard to build a team if you don't know what you're trying to do. No one fits into every situation. The strategy and the team have to fit. Things at Sempre weren't quite done that way, but we knew that when we started.
My two partners and I hadn't all worked together formally before. I had looked at some deals pretty actively with one partner. That partner was my main link to our third partner. We felt that our skills and styles complemented each other, but we needed to put some time in to make sure that we'd make a good team.
We had some ideas on various strategies to pursue. We decided to work together to vet those ideas as a way to make sure that we were as sound of a team as we felt we were. You learn a lot when you work together to make decisions, particularly where we didn't always agree and didn't all have the same style. We also discussed how to structure the firm -- who, if anyone, would be in charge?
Investment partnerships aren't like corporations. The hierarchy and reporting relatioinships are generally not as straightforward. In investment partnerships, I think that there are only two sustainable organizational structures:
- The small, equal team. Up to ~5 equal partners who agree to make decisions together (unanimously) and share all the economics equally.
- The iron fist. One partner who is firmly in charge and makes almost all the decisions. Everyone who joins the firm knows this walking in.
I'm not a fan of the second model, but it clearly works. The best thing about it is that it is unambiguous. Everyone knows who makes decisions. It's not as satisfying if you are not the owner of the iron first, but this structure can scale fairly well until the strong leader is streteched too thin.
We adopted the former model. As a team of three, we decided that we'd only go forward if we could agree to keep things equal. We wouldn't have a Managing Partner and would instead agree on how to divide up various tasks -- finance, IT, marketing, presentation and private placement memorandum preparation, fund-raising lead, etc. I think that this was a great test of our team. Although in the end we were all glad that we chose this structure, it wasn't the first instinct for all of us. We talked our way through it over several meetings. In the end, the fact that we all agreed on how to structure our firm proved to be a great test of our team dynamics. It encompassed economics, ego, organizational comfort, trust, and potential politics. If we could navigate through that decision, we knew we could make it through other tough ones.
Before we committed to each other, we decided to do thorough diligence on each member of the team. We knew that potenial limited partners would make a lot of calls on us. We wanted to hear what the LPs would hear before we formally launched ourselves as a team. All of us have people who like us and people who don't, people who would love to work with us and people who wouldn't. The key was to hear all sides of the reference check to make sure that, on balance, each of us would check out with LPs.
We each put together formal reference lists and bios. Then, we exchanged this information and started doing our own diligence on each other. We contacted many blind references on each other, as well as some obvious 'tough' references on each other. When we finished, we got back together to compare notes on what we had heard. We tried to filter out obivious biases that some references may have. Luckily, in the end, we each checked out. Since we had found all of our own skeletons, we knew that it was unlikely that LPs would uncover more. And, as time went on, there weren't new issues on any of us that came up.
I like the culture that we created at our firm. It may not work for everyone, but it worked for us. We are all direct and blunt, although polite. We brought tough issues directly to the forefront and dealt with them head-on. We all did our best to not take things personally. We trusted each other that we were all working together for the best outcome for the firm. Since we were equal partners, that should turn into the best outcome for each of us.
As we worked on different investment strategies, we compared the skills of our team to what was required for those strategies. At times, we considered adding people to our team, both at the partner level and at more junior levels. We agreed that, if necessary, we'd consider adding a partner at the beginning. However, in the long run, our goal was to cultivate partners from within the ranks of our firm. I think that promoting from within is one of the best ways to ensure that the culture of a firm endures.
Although we weren't ultimately successful, the strength and make-up of our team was by far our strongest asset. We liked working together and all hung in there through the ups and downs because we wanted to find a way to stay together. That experience is the best thing that I got out of trying to get Sempre off the ground.
Next Chapter -- Looking at Microcap stocks
Part I - Pulling The Plug
Part II - Getting Started