Demand for Capital-Efficient Growth Fuels Competition for Top PE/VC Talent

December 17, 2024 – Eric, give us an overview of the current climate for recruiting PE/ VC talent?
The market is growing tighter for key roles, especially CEOs, COOs and Go-to-Market leaders. Effectively, executives who directly touch growth, revenue or profit via operational efficiency are in demand. This is happening in part because deal flow is starting to recover. There is a continued emphasis on leaders with proven track-records in driving capital-efficient, profitable growth. This is obviously the case for Go-to-Market leaders such as CROs, CMOs and CCSOs. But it is just as important in the selection of CEOs and COOs, who both have a hand in the strategic plans and the operational aspects of achieving this kind of growth.
Any other qualities this sector is looking for now?
It’s also interesting that profitable growth is a key skillset in demand in the venture capital sector. Five years ago that generally was not the case. Many VC backed companies practiced a “grow at all costs” strategy with the idea of grabbing market share first then worrying about profitability later. Now these companies are pivoting to drive profit while growing revenue at the same time. This is in part out of necessity to keep the operations going until the exit environment improves without needing massive injections of new capital.
How do private equity firms assess cultural fit and alignment with their investment strategy during the executive recruiting process?
There are two dimensions to the cultural fit. There’s the cultural fit of a prospective executive with the rest of the executive team. Are they cohesive and collaborative? But there is also cultural fit with the sponsor too. Are the executives open about the challenges they are facing and willing to collaborate with sponsor partners to explore the right solutions?
What role does networking play in executive recruiting for venture capital firms, and how can candidates effectively leverage their connections?
Networking is important but it is only one facet of finding the right executive. There’s perhaps a false sense of security that comes from having a network referral of a candidate for a given role. Sure, someone in your network might vouch for that person. So you might have a higher degree of confidence that they can do the job over someone who is a complete unknown. But that does not mean that person is the absolute best for the role. The unknown candidate might be better. But if you are biased by who you can network to, you will never know. We actually solve this issue with our extensive back-channel referencing process. Back-channeling is when we leverage our network of more than 600,000 executives to talk to people who worked with the candidate but whom the candidate did not name as a formal reference. We often do 10 or more of these back-channel references in a search because it yields an incredibly comprehensive and unvarnished picture of the executive’s potential. And that solves the issue of the unknown candidate who does not happen to be in your network. We make every candidate known through back-channel referencing, so you are less likely to miss the superstar you need.
How do PE/VC firms approach diversity and inclusion in their executive hiring practices?
Diverse points of view and backgrounds are proven to amplify leadership team execution and effectiveness. The VC and PE sponsors we work with understand how important this is when assembling a management team. In fact, we work with some of our PE clients on networking and continuing education programs that are geared toward under-represented groups, to help these executives to advance their careers and improve representation in management.
Why is collaboration between talent partners and portfolio services/platform teams essential in today’s business environment?
Collaboration between talent partners and portfolio services teams such as operating partners is essential because talent is the mission critical lever for value creation. In the past, private equity firms could rely on financial engineering or finding unique deals for undervalued assets to create value. Those days are gone and today landing
the most impactful talent—especially in senior leadership roles—is the key to value creation and achieving the investment thesis. This calls for tight alignment between talent partners and others who have a hand in guiding the portfolio and assisting management with execution, such as operating partners. Put another way, if your operating advisors advocate certain programs and strategies, but you do not have the management talent in seat to execute on them, then the operational guidance is squandered.
What specific roles do marketing, talent, business development, and operating partners play in driving value creation for portfolio companies?
The management leaders and operating partners in all four of these disciplines need to be in sync around the value creation plan so that each can play their part to achieve the mission. An example illustrates this best. Let’s say the value creation target is to achieve capital efficient growth over 4 years, increasing the top line while maintaining or enhancing EBITDA margin. The end result should be a significantly higher valuation at exit compared to what was paid for the portfolio company. Your marketing leader needs to be adept at generating demand with a lead budget. Your talent leader needs to be able to land the needed talent at reason- able comp levels. Your business development leader needs to be able to qualify and close business efficiently. And all of these leaders need to be taking advantage of the expertise of the operating partners around growing profitably.
“Diverse points of view and backgrounds are proven to amplify leadership team execution and effectiveness.”
How does authenticity serve as a differentiator in building talent networks within VC and PE firms?
Authenticity is essential, not merely a differentiator, in how sponsors and management relate. In our experience, the decisions made about talent are truly critical—the success or failure of
the investment thesis depends on them. So that means that the engagement and relationship between leadership talent and the sponsors must be rooted in authentic, real communication from day one. If there is no willingness to be open about difficult topics, the relationship between sponsor and management is probably doomed. So our advice to sponsors looking to bring in leadership talent and build out their network for it is to prioritize authenticity.
In what ways can effective collaboration influence the hiring process of leaders for portfolio companies?
Collaboration between sponsors and portfolio companies is the key here, and each side should bring its particular strengths to the table. So for example a sponsor with a strong go-to-market operating advisor bench can help a portfolio company refine its sales strategy and get a firm focus on the type of sales leader needed to drive it.
What are some examples of successful growth and operational improvement resulting from strong partnerships among these teams?
Examples of growth and operational improvement possible from these partnerships include:
- Generating capital-efficient growth, increasing both revenue and profit simultaneously, by aligning value creation plans with leadership talent skillsets.
- Orchestrating inorganic growth, such as via M&A as part of the value creation plan, the result of collaboration between management-especially the CEO and CFO—and sponsors. Key talent decisions include bringing on managers who can integrate acquired companies and people into operations.
- Maximizing margins by identifying inefficiencies, driving out costs, and achieving economies of scale. These are often the result of collaboration among the CFO, COO and operating partners with strong track records in achieving operational efficiencies.