Tuesday, September 22, 2009

Value Added VCs?

One of the hardest things for me as a former CEO is to get used to the idea of not being the CEO anymore. As a VC I imagined working closely with the CEOs of our portfolio companies to help them better manage their business and avoid the pitfalls and mistakes that I had made (there were and still are a lot). Of course, as any father soon realizes, your son never listens, you are an idiot, and you gotta let him make his own mistakes. Classically we want entrepreneurs who are coachable, so we can help them, but, like sons, we don’t want them to be too pliable--we like the vinegar of self worth, and ego, provided it's fueled by passion and true belief.

So what do you do when the CEO won’t listen? With the disclaimer that I am an old-school entrepreneur, I think not listening is a major alarm bell--it usually means the CEO is letting their ego make decisions and there is never a good outcome from this. Now the flip side is that the CEO is better than their VCs and likely more operationally experienced and therefore recognizes bad advice and inexperience and is not willing to do the wrong thing merely to placate the egos of their VCs ;-)

In this scenario, the CEO is actually still wrong; a good experienced CEO with their ego under control knows how to manage their BoD and deal with all types of advice and investors, bad and good. Generally there are nuggets of wisdom in the most unlikely places, and if you can thin slice through the chaff you can find those kernels. Having said this, how much value can an armchair quarterback really bring to a startup?

If you parachute in for BoD meeting once a month, it's unlikely you will have many pearls of wisdom to impart, unless you have built that type of business before in that specific market with those specific customers, and your knowledge is current. It's true, VCs are great at pattern recognition and can spot a flawed business argument, but often a little knowledge is a dangerous thing. I think the error can go too far the other way as well, when the VC wants to micromanage the CEO, because no VC has the time to really add day-to-day value, and let’s face it, we are wrong as often as we are right, like everyone else ...

The best interaction for me is as an auxiliary brain for your CEO, ideally they already have this partner in their management team who can fill this role day to day, but it really helps to have an outside view, uncluttered by the day to day management issues. VCs by virtue of looking at lots of deals and companies, can bring a unique perspective to the strategic planning process.

Investors have to have a healthy respect for their CEOs, but it's surprising to me how some CEOs can allow themselves to get sideways with their VCs. If its truly fueled by passion and not ego (or insecurity) then it's excusable occasionally, but I am stunned at the stupidity of any CEO who wants to fight with their investor. I have seen companies go down simply because of this, sadly driven by big egos on both sides--I once saw an entrepreneur so cleverly structure a deal through nested companies that he achieved the equivalent of antidilution over his investors; even after it was explained step by step it was still hard to understand how it was accomplished--but then the investors stonewalled and refused funding, denying meeting milestones, and killed the company (and their investment). What a stupid waste.

For any investor to do their job for their LPs, they need to have some degree of control over the company, to do this they need complete transparency from the team, and this enables trust in the CEO. Any CEO who refuses to listen, be coached, and leverage their investors is letting his insecurity drive the bus, likely over a cliff. Fortunately there is an easy solution to this problem ...

Responses to comments:

Peg has left a new comment on your post "Success or failure":
Thank you for this; you remind me to buck up and try again. My self-funded company failed last year after a bad car accident left me hospitalized for several months followed by five more months of being bed-bound at home. The corp. did not make it with me out of the picture, and at the same time, unable to add more capital to get them through it, though the staff tried valiantly to keep going for the 10 months immediately after the accident. I learned the importance of key man--not only insurance, but to have a person and a plan in place. Thanks for the reminder that failure is a step one would rather not take, but once taken, can be a path to another venture. At times in the last 18 months, I have forgotten that. I'll avidly follow your new blog. Thanks!

Peg – getting up and trying again is what it's all about, anytime you try to create something great the chances of failure are high, but the real failures are the ones that don’t try but criticize those that do, and end with an I told you so ... good luck!

Anonymous has left a new comment on your post "Success or failure":
Larry, By your definition, a Ponzi scheme would be a "successful" business. The true definition of a "success" is a company that creates wealth, rather than simply redistributing it. Was wealth created in your case or only redistributed? R.

R – Perhaps you should re-read – we were defining failure, not success; fear of failure stops too many of us from trying to change our world – failure is where we learn our most valuable lessons – success is great but it doesn’t teach us much – in the case I discussed wealth was created by the company and redistributed to the investors