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 CEOs of our portfolio companies to help them better manage their business and avoid the pitfalls and mistakes 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 his or her 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 a 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 must 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 it's 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 ...