Collaborative Carry
Why we give 20% of our profits to our portfolio company founders.
Six months ago, we decided to give 20% of our share of our returns (carried interest) to the founders of our portfolio companies. In essence, our founders are all investors in each other. They also have a common purpose—shared success.
At Hillfarrance, we call this Collaborative Carry.
Why are we doing this? Quite simply, we believe in the power of sharing knowledge. As Lew Platt, the Chairman, President and CEO of Hewlett Packard, once put it:
“If only HP knew what HP knows, we would be three times more productive.”
In our portfolio, we have some of the finest entrepreneurial and technical minds in Australasia, if not the world. Individuals and teams that have grown from successes and failures and can pass on vital learning. People with expanded networks of potentially valuable contacts who could change the destiny of another startup. Game-changers who have built infrastructures, such as offices or more efficient processes that might benefit others in our community. To be clear, this initiative is not a marketing ploy. Collaborative carry embodies one of Hillfarrance’s core values—We preserve and enhance the mana of all in our Village.
So how does collaborative carry work for our founders?
As we have mentioned, Collaborative Carry represents that we share the fund’s upside with the founders that we invest in. After all, commitments are returned to our LPs (Limited Partners, or fund investors), Hillfarrance shares 20% of the fund’s profits (otherwise called carried interest) with our portfolio company founders.
We do this by allocating each entrepreneur a set percentage of carry. We distribute the carry equally to each company and the founders personally within each company.
Much like an ESOP (Employee Share Options Pool), your carry will vest over several years, just like how it is for us as Partners of the fund. Nice and simple.
When profits are shared (the majority of which are earned within a 7-10 year period), you will receive a share of any earnings following your percentage of the carry.
Why do so few funds offer something like this?
As you might expect, not all VC fund managers want to allocate 20% of their profits, and as such, this is not a common feature of most venture capital funds. In fact, we have created a club of only two funds in the world to offer that much of a share to our portfolio company founders.
The handful of other venture funds who have taken this step have mainly discussed the increased deal flow that arises from founders having a vested interest in the fund. In our experience, exceptional founders do indeed spend time with other great entrepreneurs, and this might encourage an introduction to our fund over others. However, it is our opinion that this is a welcome added benefit, but it is a secondary reason why sharing our profits with our founders is so exciting to us.
Teamwork. Whilst it is still early days, we have seen that this initiative has begun to weave a common thread that binds all of our founders together in a harmonious community. We have different portfolio companies sharing international office space, buying products and services from each other, and sharing prospective candidates for new roles.
Optionality. It is no secret that more startups fail than succeed, and we are not immune to that. However, Collaborative Carry provides a valuable additional liquidity event to all of the founders in our portfolio, whether their startup is successful or not. If we do our job right then, this could be a significant amount of remuneration that might fuel another crack at the startup game.
Education. We think that startup founders have the hallmarks of brilliant VCs. With our founders becoming closely involved in the selection process and visibility into the ongoing management of the portfolio, they will supplement their entrepreneurial instincts with the rigours of structured startup investing.
Even with these cool things, we think we are just scratching the surface of the potential from Collaborative Carry, and we can’t wait for what the future holds for this movement.
Summary
You have probably heard us wax lyrical about our Village concept within our venture capital firm. The Village manifests itself in many ways, but none perhaps as literal as Collaborative Carry. Supporting each other to reach a shared goal is at the core of our philosophy as startup investors.
We acknowledge that not all investors share our belief in collaborative capital, which is fine. It could be a considerable financial sum that would otherwise be paid to the hard-working people who run their fund. However, without contestation, we believe that our success as a business is determined by the people we invest in, and they should be rewarded for that.
The relative early nature of the New Zealand startup economy offers entrepreneurial fund managers like ourselves the chance to innovate within the venture capital asset class. With no previous legal, structural precedent for this offering, we worked closely with our legal counsel at Tompkins Wake and designed collaborative capital from the ground up, creating significant IP for our firm. We want to thank Michael Shanahan and Phil Taylor, Partners at Tompkins Wake, for taking my back-of-a-napkin scribble and turning it into reality.
Finally, we want to thank one of our LPs (you know who you are 😉) who presented this concept to me almost a year ago and inspired confidence in us to proceed with this endeavour.
If you are interested in learning more about Collaborative Carry what it is like to work with Hillfarrance, please contact us at pitches@hillfarrance.com.