Succession Planning: The Biggest Problem Facing Venture Capital

Like many partnerships, venture funds have a problem transferring power to the next generation. The co-founders of Polaris Partners think they have an answer.

Twenty years ago Jonathan Flint and Terrance McGuire co-founded Polaris Partners, a Boston-based venture capital firm, with partner emeritus Steven Arnold. Three years ago, Flint and McGuire handed over day-to-day management of the firm to a team of four managing general partners — Brian Chee, Amir Nashat, Bryce Youngren and David Barrett. But they didn’t just take their money and stroll away. Instead, the pair launched an innovative experiment that tries to resolve one of a maturing venture industry’s biggest problems: transitioning from one generation of leadership to the next.

Today, Flint, 64, and McGuire, 60, remain active members of Polaris Partners’ investment team, working out of the firm’s headquarters at the Boston Seaport District, doing new deals and overseeing portfolios. But they have also created a special vehicle for their own use called Polaris Founders Capital. Through Founders Capital, the pair can invest their own money in companies they personally source that may not be in sectors Polaris focuses on. If their investments do fit within Polaris’s tech and life-sciences expertise, they’ll be available to the regular Polaris funds.

Polaris Founders Capital “allows us to build on our 30 years of experience as venture capitalists and continue to work with some really smart and interesting people,” says Flint. Also joining as partners in Founders Capital are Lawrence “Larry” Lucchino, a lawyer, former CEO of the Boston Red Sox and old friend of Flint, and former Polaris associate Gregg Rubin.

The idea of veteran venture capitalists stepping back from their firms isn’t new. John Doerr, who joined Palo Alto, California’s Kleiner Perkins Caufield & Byers in 1980 (the firm was formed in 1972) and ran its day-to-day operations, announced in March he would step back, taking on the role of chairman while continuing to act as a player-coach. “The venture industry is changing all the time,” Doerr wrote on KPCB’s blog. “We must keep changing to better compete and serve entrepreneurs.”

Polaris Founders Capital may be one solution to venture’s often-unstable mix of dynamism and continuity. While it frees Flint and McGuire to pass Polaris’s management to a new group of partners, it also enables them to stay involved, provide advice and explore fresh investment areas. VCs are recognizing that some problems need to be addressed uniquely. Flint and McGuire are taking on ideas that don’t necessarily fit venture mandates, then de-risking them with personal involvement and capital.

“Venture capitalists aren’t very good at transitions,” says a New York asset manager who specializes in alternatives. “Most VCs transition only when they have to. And when they do, they don’t do a very good job.”

Flint says he, McGuire and Arnold began planning for a transition soon after they launched Polaris in 1996. They had seen the damage — financial, personal and to LP relationships — when partners bolted without planning. They wanted to make sure that it would not happen to Polaris, which they viewed as a long-lasting partnership.

The problem is complex. Polaris has now raised seven funds (not including Founders Capital) and has more than $4 billion under management. “There are too many moving parts that need to be aligned, and many VCs simply don’t understand that or pay enough attention,” says James Bailey, the co-founder of Boston’s Cambridge Associates, which tracks alternative assets such as venture capital and is an investment consultant to institutional investors.

“Economics matter the most,” Bailey notes. “Without a well-designed compensation structure, it gets difficult to retain senior partners. And if you get senior people walking away because they aren’t getting paid enough, it’s tough to attract new partners.” Compensation planning requires thought and foresight; it can’t be imposed overnight. “There’s too much money at stake for it not to matter — to limited partners and the general partners,” he says.

LPs such as pension funds and endowments need to be assured that portfolios of older funds will continue to be adequately supervised by experienced GPs, and that veterans will be around to advise new managing partners and not compete with them.

In 2009, as they were raising Polaris’s sixth fund, Flint and McGuire began introducing four younger partners, all of whom had successful track records, into management. By the time they raised Polaris VII in 2014, Flint and McGuire were able to pass management responsibility to them.“It takes a long time to learn this business and even longer for a partnership to create a multigenerational legacy,” says Chee, one of the current managing general partners.

Chee, 50, a West Point graduate and a veteran of the first Gulf War, was Polaris’s initial hire in 1996. Although he had little experience as a manager or in an entrepreneurial setting, he learned on the job. “They gave me an enormous amount of autonomy and the freedom to succeed — and fail,” he says.

The belief that Chee and the others can manage Polaris gave Flint and McGuire a sense of purpose and freedom.

Flint has always been an unlikely venture capitalist. Most VCs have MBAs and engineering degrees. Flint’s résumé is a mix of Hollywood, Capitol Hill and the law. He worked as a crew member on several Hollywood movies, got his JD at the University of Virginia Law School and served on the Judiciary Committee’s research team during the Nixon impeachment with Hillary Clinton and Lucchino and on the staff of the Watergate special prosecutor. He says his career was “rescued” in 1984, when Bill Egan, of Boston-based VC firm Burr, Egan & Deleague, hired him.

McGuire joined the firm two years later. Burr Egan dissolved in 1995. In 1996, Flint and McGuire joined Burr Egan colleague Arnold, a veteran of Atari, Lucasfilm and Microsoft, to form Polaris.

At Polaris, Flint was initially known for his enterprise software investments. More recently he has invested in a diverse array of companies, such as Living Proof, a Cambridge, Massachusetts, company that applies medical technologies to beauty products, and EXOS (formerly Athletes’ Performance), a Phoenix-based provider of integrated performance training, nutrition and physical therapy for elite athletes. These experiences led Flint to more consumer- and sports-related products, an area Lucchino, who played on the Bill Bradley-led Princeton basketball teams of the ’60s and has four World Series rings and one from the Super Bowl (the latter from the Washington Redskins), knows a few things about as well.

McGuire has a slightly different orientation. A successful investor in life-sciences companies such as Advanced Inhalation Research (acquired by Dublin-based Alkermes in 1999); Cambridge-based Ironwood Pharmaceuticals, Lexington, Massachusetts’ Cubist Pharmaceuticals and Acceleron Pharma in Cambridge, McGuire has worked closely with some of the East Coast’s best scientific entrepreneurs: the Massachusetts Institute of Technology’s biomedical engineer Robert Langer and Dartmouth College bioengineer Tillman Gerngross. These collaborations have helped launch more than 25 companies.

McGuire also developed an unusual involvement with Iceland, which began in the 1990s when Polaris invested in deCODE Genetics, a Reykjavik genomics research company, with several other venture firms. Following the successes of genomics companies such as Rockville, Maryland–based Human Genome Sciences and Cambridge-based Millennium Pharmaceuticals, deCODE has had a volatile history. But Polaris hung in and in 2012 Amgen acquired the company for $415 million.

Earlier this year Founders Capital led an $11 million financing for Icelandic Provisions, a maker of Skyr, an Icelandic yogurt. In a health-conscious market that has seen the success of yogurt companies such as Chobani and Stonyfield Farm, Flint is convinced there is room for more growth and more companies.

For his part, McGuire says he will continue to work with Langer and Gerngross, who have helped create significant products, sustainable businesses and investor profits. “As I go forward, the question I ask myself is how should I spend my time and my capital?” he says.

For both McGuire and Flint, Founders Capital is a way to return to the roots of venture capital by searching further afield. Despite the success of high-profile venture-backed start-ups like Facebook and Uber Technologies, venture capital’s relevance continues to be questioned, not least by VCs themselves, who see capital and talent lured away by flashier commercial opportunities. What the industry needs, many say, is not deeper pockets but experts capable of nurturing ideas and technologies — the kind of expertise that only veteran VCs like McGuire and Flint possess. •