1-Sentence Summary: Money matters, but make sure to invest in becoming the kind of organization that will attract great talent.

Union Square Ventures‘ Fred Wilson is one of the best technology venture capitalist investors in the world, which means he pours millions of dollars into companies that (he hopes) are poised to take off like a rocket and grow and grow and grow.

He’s not seeking opportunities with a 10% annual return, or even 20%.

More like 5,000%.

That’s not a misprint – they were early investors in Twitter, back in 2007, when it was worth $35 million. Today it’s a public company worth almost $20 billion.

Venture capital is a risky, hit-driven business. The vast majority of firms he invests in will fail or flounder, resulting in a total loss of Wilson’s investment.

But the top one or two will (hopefully) be so wildly profitable that they overwhelm all the losing bets and deliver returns the vast majority of other investors* can only dream of.

*Most venture capital firms perform poorly, with the vast majority of profits flowing to a very tiny number of firms.

Great talent is rare and (with venture capital flowing freely), someone else is always willing to pay more. Talent is difficult and expensive to recruit, and right after they’re hired they have the luxury of switching companies for even more money.

Given this landscape, one might assume Wilson would advocate that firms he invests in hire mercenaries – pay top dollar for top people and drive them relentlessly, at all costs, in order to grow, grow, grow!

Instead, in his “Loyalists vs Mercenaries” blog post, he advocates that startup founders must build loyal teams.

This does not mean paying people less than their market value.

It means paying market value and creating a culture, mission and set of core values they believe in, and living up to them every single day (especially when it’s inconvenient).

In his words:

So what can you do to build a company full of loyalists instead of a company full of mercenaries?

First you must lead. If you think you are a good leader, get better. If you think you are a great leader, you can get better. Get coaching and focus on becoming the best leader you can be.

Second, build a mission driven company. Make sure you are doing something that matters. If all you are doing is trying to make money for yourself, then all your employees will try to do is make money for themselves.

Third, invest in values and culture. Matt Blumberg’s post is a good starting place for some tips on how to do that…

More of Wilson’s words on leadership: “At the end of the day, people are loyal to a leader they believe in. Leading is not managing… It is charisma, it is strength, it is communication, it is vision, it is listening, it is being there, it is calm, it is connecting, it is trust, faith, and belief. The best founders are great leaders.”

More of Wilson’s words on mission: “People are loyal to a mission (where) they believe in what they are working on and think it will make a difference in their lives and the lives of others. This is why investing in mission driven companies can produce great financial returns. Mission driven companies have something most companies don’t have. They have “why” that keeps the team together through difficult times…”

1-Sentence Summary: Money matters, but make sure to invest in becoming the kind of organization that will attract great talent.