Venture capital-backed chief executives in the US earn more than they did 10 years ago, according to a study by American trade body National Venture Capital Association and recruitment firm Spencer Stuart.
In a survey of 200 VCs, nearly half the NVCA’s membership of 440 firms, 47% said they were paying chief executives comparably greater cash compensation and granting more equity. VCs said this was because of the longer-term nature of the role as compared to 2001 and today’s CEO roles require executives with a broader skill set.
Brenda Gavin, partner at Quaker BioVentures, said: "CEOs used to be willing to take a hit on compensation or some of the benefits they’d get from big companies with the expectation that they’re betting on the equity. Today, with the high risk we see with our companies and the lack of public markets, we have to pay more, in the biotech space especially."
Employment contracts including negotiated severance packages have also become more common for CEOs and other senior staff.
Deepak Kamra, general partner at Canaan Partners, said: "There are many more experienced people around today, but it was in some ways easier to attract a good CEO in the past because of the kinds of exits people were getting and the speed with which they were getting them.
"Now, we look for patience and the ability to stick it out – you just don’t see the guys who want to score an exit in two years and then return to their winery anymore."
In both the 2001 and 2010 studies, venture capitalists said the strength of the management team was the most important factor in deciding whether to fund a company, followed by market sector.
Kamra said: "When we make an investment where there’s something exciting about the market or business model and we say, ‘management may not be perfect, but the opportunity is so great, we can fix it later,’ it usually turns out to be a mistake."
Investors also feel more confident in their assessment of management. In 2001, 40% predominantly agreed their firms recruited the best talent and thoroughly assessed management teams or remove low performers quickly. In 2010, 84% said their firms recruited the best talent, 63% agreed they consistently and thoroughly assess management teams, and 67% agreed they removed low-performing CEOs from portfolio companies quickly.
According to the 2010 survey, companies are finding it slightly easier today to attract and retain leaders for their portfolio companies. Kate Mitchell, NVCA chair and co-founder and managing director of Scale Venture Partners, said: "It is easier to attract and retain top CEO talent for two reasons.
"First, CEOs are walking away from less upside by leaving their current position than they were a decade ago. Second, with less capital in the venture industry, each startup has a higher chance of being a success – we are no longer financing too many ‘me-too’ companies."
The PricewaterhouseCoopers/NVCA Money Tree Report, using Thomson Reuters data, said the amount invested in VC-backed companies in 2001 exceeded $7bn, more than double the roughly $3.3bn invested in 2009.