Platform Team

What does a ventures team do?

A venture firm's people split into two groups. The investment team sources, diligences, prices and governs deals and sits on boards. The platform team does everything else the firm offers portfolio companies: recruiting, marketing and communications, go-to-market introductions, technical and product help, and policy or regulatory work. Only the first group makes investment decisions.

What a platform team actually is

A platform team is the non-investment staff a firm employs to deliver services to its portfolio companies. Andreessen Horowitz, the firm most associated with the model, describes itself on its own site as having the largest team of operators in venture and names marketing, talent, legal and policy among those functions, positioning the firm as dedicated to helping founders at every stage.

The recurring functions across firms that run this model:

• Talent and recruiting. Executive search, candidate pipelines, compensation benchmarking, and help building a company's own recruiting function.
• Marketing and communications. Positioning, launch support, press relationships, and content.
• Go-to-market. Introductions to enterprise buyers and channel partners, sometimes with a named list of relationships the firm maintains.
• Technical and product. Engineering, data, security and product review, often delivered by former operators.
• Policy and regulatory. Engagement with regulators, which matters most in health, financial services, crypto and defense.
• Community. Peer groups and events connecting portfolio company executives to each other by function.

The distinction that matters is not the list of functions but whether a firm employs people to do this work full time, or whether partners do it part time and call it platform.

The regulated version of the same idea

Private venture partnerships offer platform services because they choose to. One category of fund is required to.

To elect business development company status, a company must engage in the business of furnishing capital and offering significant managerial assistance to eligible portfolio companies. The Investment Company Act of 1940 defines making available significant managerial assistance, in relevant part, as an arrangement whereby the fund, through its officers, directors, employees or general partners, offers to provide and, if accepted, does provide significant guidance and counsel concerning the management, operations or business objectives of a portfolio company, or the fund's exercise of a controlling influence over the portfolio company's management or policies. A business development company must hold at least 70 percent of its total assets in qualifying assets, and a holding in an eligible portfolio company to which the fund does not offer significant managerial assistance falls outside that 70 percent.

That definition is worth reading even if you never touch a business development company, because it is the rare place US law puts a standard on what help beyond capital means, and the standard it sets is an offer of significant guidance and counsel, not a headcount.

Who pays for it, and why that is the real question

Platform teams are an expense of the management company, and the management fee is the management company's revenue. So the economics reduce to a single question: does the firm absorb the cost, or bill it to portfolio companies?

ILPA's position on billing is unambiguous. Its Principles state that no fees should be charged to portfolio companies, and that any portfolio company fees that are charged should be 100 percent offset against the management fee and subject to standard disclosure. Fees exempt from the offset provisions should be rare and clearly defined in the limited partnership agreement, and where such fees are not fully offset, the manager should disclose the amount it received including anything outside the offset provision. ILPA also asks that fund documentation adequately detail the policies for calculating, assessing and reporting fees and expenses allocable to portfolio companies that have a significant impact on an investor's commitment or net return.

Read that alongside the fee itself and the consequence becomes clear. Under a full offset, an investor is economically indifferent to whether platform services are billed to the portfolio company or absorbed by the firm, because every dollar billed reduces the fee. So is the manager, as long as the offset really is 100 percent, which is why the exemptions written into the offset provision, rather than the offset rate itself, are where this negotiation actually happens.

A worked example with the arithmetic shown

Assume a hypothetical $500,000,000 fund charging a 2 percent management fee during its investment period, and a hypothetical platform team of 15 people at a fully loaded cost of $300,000 each. All figures here are hypothetical.

• Annual management fee. 0.02 times $500,000,000 equals $10,000,000.
• Annual platform team cost. 15 times $300,000 equals $4,500,000.
• Share of the fee consumed. $4,500,000 divided by $10,000,000 equals 0.45, or 45 percent of the year's fee.

Now scale the fund down without scaling the team down, because the team's cost is close to fixed.

• A $150,000,000 fund at the same rate earns 0.02 times $150,000,000, or $3,000,000 of annual fee.
• The same $4,500,000 team costs 4,500,000 divided by 3,000,000, or 1.5 times the entire annual fee.

And apply ILPA's offset to the first case, assuming the firm billed the full $4,500,000 to portfolio companies.

• Fee payable after a 100 percent offset. $10,000,000 less $4,500,000 equals $5,500,000.
• The management company's total revenue is unchanged at $10,000,000: $5,500,000 of management fee plus the $4,500,000 it billed the portfolio companies.

Re-check the arithmetic. 0.02 x 500,000,000 = 10,000,000. 15 x 300,000 = 4,500,000. 4,500,000 / 10,000,000 = 0.45. 0.02 x 150,000,000 = 3,000,000, and 4,500,000 / 3,000,000 = 1.5. 10,000,000 - 4,500,000 = 5,500,000.

Two conclusions follow, and both are structural rather than a matter of taste. A serious platform team is only fundable out of a large fee base, which is why the model concentrates among large funds. And under a full offset, billing portfolio companies changes who writes the check without changing the manager's revenue, which is why any fee carved out of the offset is worth more to a manager than the headline fee rate.

Where it shows up in documents

The platform team is not a term of art in fund documents, so look for its financial footprint rather than its name.

• The management fee provision and the fee offset provision in the limited partnership agreement, read together. The offset language decides whether portfolio company charges reduce the fee.
• The expense allocation provision, which says whether specific service costs are partnership expenses or management company expenses.
• The annual fee and expense reporting, where ILPA asks that fees and expenses allocable to portfolio companies be disclosed and that fee and expense reporting fall within the scope of the fund's annual audit.
• For a business development company, the registration statement's regulation section, which states whether the fund makes available significant managerial assistance and how that affects its qualifying asset test.

Common mistakes

Treating headcount as evidence of quality. Nothing in the fund's documents, and nothing in the 1940 Act standard, measures a platform by size. The only verifiable diligence is talking to portfolio companies that used a specific function recently.

Assuming platform services are free to the company. They may be billed, and whether the billing is offset against the fee is a document question, not a courtesy question.

Confusing a platform team with an operating partner. An operating partner usually carries economics in the fund and works on a small number of companies; platform staff are typically employees of the management company serving the whole portfolio.

Expecting a small fund to have one. On the arithmetic above, a fixed platform cost can exceed the entire management fee of a sub-$200,000,000 fund, which is why emerging managers deliver the same help through networks rather than payroll.

How it relates to adjacent terms

The platform model is the strategy; the platform team is the staffing that implements it, and the two are often used interchangeably in marketing even though only one shows up on a payroll.

An operating partner is the individual version of the same promise, compensated through fund economics rather than salary, which changes both the incentive and the number of companies one person can serve.

The management fee is the constraint. Because platform costs are paid from fee income, the size of a firm's platform is a prediction you can make from its fund size and fee rate before you ever read its website.

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