Investment firms are seeking the help of human capital partners, or individuals who can help their portfolio companies with all matters HR-related — from compensation to culture.
A well-managed workforce is essential to the success of any developing company. And yet, it’s often a pain point for businesses looking to build out everything from talent management to employee engagement.
As a result, we’re seeing a growing number of investment firms in the United States — and globally — establish a new role known as the human capital partner (HCP).
This individual is an important liaison to their portfolio companies’ HR teams and works with them on a variety of matters — from establishing a compensation philosophy to helping prepare their compensation structures & governance systems for an IPO.
But why now?
Perhaps it is the surge in number of startups rushing to meet the demand for new human capital tools and insights that is changing perceptions within VC and PE firms. In Q1’18, $172M was invested in firms focused on employee engagement analytics & talent management solutions — the highest amount raised in any quarter thus far for this category of companies.
Or, it could be a growing realization that developing strong cultural norms around issues like diversity, inclusion, pay equity and talent management as early as possible inside companies is well worth the effort. It could also simply be investment firms’ frustration over the never-ending challenge of competing for top talent amidst record-setting investment levels and historically low unemployment rates.
In reality, it is a mix of everything above and more, which is why investment firms could greatly benefit from hiring an HCP. We dig into 5 of the biggest reasons why, below.
- Rapid access to reliable new hire data
HCPs need reliable and in-depth compensation data in order to assess the rapidly changing talent market on behalf of their portfolio companies. This data can help them make sound decisions on attracting and retaining mission-critical hires, such as the CTO or CMO. Failing to hire the right people into these positions — and keep them there — can set a company back big time.
2. Equity is about much more than dilution management
Managing equity strategy has never been more complex, in part due to private companies increasingly competing with public companies for talent, and businesses taking longer to go public.
Private companies need to access secondary markets and provide creative liquidity solutions to employees to keep them engaged. In the past, equity awards beyond new-hire grants were rarely considered. In fact, often the fastest way to get thrown out of a board meeting would be to utter the words “equity refresh.”
However, we’ve seen a softening from investors who have become more open to the idea of follow-on awards to attract and retain top talent. While the concept of an annual award is still predominantly a public company practice, this approach has become more common at VC-backed private companies over the last five years.
HCPs can provide the data to justify whether an equity refresh is needed, as well as what the program details should entail so that companies can be assured that they are making the right decisions.
3. You can survive without workforce analytics, but it’s really hard
Many of the HCPs we work with provide expertise to portfolio companies as they seek to implement workforce analytics tools and strategic workforce plans. The discipline of workforce analytics is complex, quickly evolving, and expensive to do right.
Most companies use analytics to understand the current state of their organizations, rather than to predict how things will be in the future and to then implement policies and plans to address expected changes.
HCPs can step in by using their expertise to partner with reputable firms and implement tools across portfolio companies for better efficiency and oversight.
4. Good governance matters
One of the most important events in the life of a private company is going public. What used to feel like a sprint is now more like a marathon: Going public requires careful planning that can start up to 18 months before race day.
The rules and processes for going public are extensive and much different than they were just 10 years ago. Moreover, public investors have increasingly high expectations for the governance processes of newly public companies.
HCPs can help management address critical issues, including:
- Recruiting independent directors to the board
- Setting director pay
- Establishing key board committees
- Determining whether to make any cash or equity changes to executive compensation prior to going public
- Defining the post-IPO equity pool
- Drafting involuntary termination and change-in-control agreements
5. You only get one chance to get culture right
Finally, HCPs have an opportunity to get more involved in ensuring their portfolio companies are setting the right corporate culture from the start. They can do this by asking the right questions that hit on a number of important topics, with questions like:
- Do our hiring and promotion policies support inclusion (and how is that reflected in our workforce composition)?
- Do our pay practices have unexplained or problematic pay gaps that exist along gender or minority lines?
- Does the tone at the very top of the organization reflect our values (whether that be teamwork, collaboration, ingenuity, fairness, etc.)?
The sooner companies bake these issues into their DNA, the better off all stakeholders will be.
Make Your HCP a Competitive Advantage
Smart VC and PE firms know they need a bit of makeover when it comes to helping their portfolio companies with HR issues.
The days of focusing almost exclusively on managing equity dilution are over, and the HR game is much more complex and visible now. Portfolio companies crave expert advice and genuine partnership when it comes to issues like talent management, workforce planning, culture, and compensation.
VC and PE firms that invest in people who can deliver on these issues across their portfolios will become better, more attractive partners.
To learn more about Radford’s investor firm offerings and how we support human capital partners and their teams, you can contact us at consulting@radford.com.
This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like:
- Earnings Transcripts Search Engine & Analytics to get an information edge on competitors’ and incumbents’ strategies
- Patent Analytics to see where innovation is happening next
- Company Mosaic Scores to evaluate startup health, based on our National Science Foundation-backed algorithm
- Business Relationships to quickly see a company’s competitors, partners, and more
- Market Sizing Tools to visualize market growth and spot the next big opportunity