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July 21, 2005

Why Being A VC-backed Founder Can (Sometimes) Suck

"I'm the founder of Foobar, we're a VC-backed start-up," you hear someone declare proudly at a cocktail party.  Being a VC-backed founder can have great cache and everyone around them thinks they're so cool, but deep down, many founders know that being a VC-backed founder can sometimes simply suck.

The primary issue is that you're always afraid your VC is going to fire you.  It's the unspoken thing that founders live in fear of.  They work like hell to create something from nothing, take this great VC's money, get invited to all their great parties, get told how much everyone loves them, but live in fear that after each board meeting, they're going to get the call.  "Hi Joe - it's your VC.  Listen, we need to get together for breakfast."  Uh oh.

Let's put it right out on the table - VC board members are always evaluating the performance of the CEO.  That's the fundamental job of the board of directors:  hire, fire and compensate the CEO.  When you're a "hired gun", professional manager, you know the drill.  You're only as good as your last quarter, goes the old board room yarn.  But founders are typically less glib about it all, because a founder can't just bounce from one CEO gig to another - they've put their blood, sweat and tears into this start-up and it may be their only ticket to the big time.  And they're damned if they let some pencil-pushing VC who simply doesn't "get it" ruin it for them.

On the VC side of the table, watching a founder run out of steam and lose their ability to manage and build the company is incredibly frustrating.  Great company, great technology, great market position and a huge opportunity, but the founder just won't let go and let the best people in the world come in and take the company forward.  It's like watching a train wreck - you know exactly how it will end and it's impossible to stop.  Founders love to cite Bill Gates, Larry Ellison and Michael Dell as young, founding CEOs who run their companies from the garage through multi-billion dollars in revenue.  Why can't they do the same?  If it were that easy, there would be far more than a mere handful of Fortune 1000 companies still run by their founders.  A friend of mine used to talk about the three stages of a company's life:  the jungle, the dirt road and the highway.  The right CEO and executive team in the jungle tends to be very different from who you need when you're on the highway.  Founders very rarely can be effective leaders during through all these complex transitions.

So what are founders and VCs supposed to do?  Honest, open, direct dialog is probably best.  Founders should be clear with their boards about what they are trying to achieve professionally and solicit feedback as to how they're perceived and what they need to work on to be more effective CEOs as the company's needs evolve.  And VCs should discuss clear expectations, parameters and milestones to remove any lingering ambiguity so that the founders aren't wondering whether they're going to get the call after every board meeting.

It can really be a ton of fun to found a VC-backed company, but if you're not communicating clearly about mutual expectations and goal, succession plans, milestones, etc...it can sometimes suck.

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Great post; I could have read a lot more about this subject. As a former VC-backed founder and CEO, your post brought back some not so fond memories of discussions I dreaded. Though I never did get canned, I did spend more time thinking about it than I would have liked to. I am not sure what the answer to this problem (?) is, but your second to last paragraph begins to address it. If this discussion could be had prior to an investment, it may work out best for all parties, though it may scare some founders/entrepreuneurs/CEOs from those firms. I guess no one wants the Peter Principle applied to them, it sort of sucks!

I think the other thing that is important for founders of VC backed companies is that the goal is to make money, not build a fiefdom. If someone else can do a better job, so be it.

It's incumbent upon the entrepreneur/CEO who accepts outside investment to periodically evaluate his position in light of a simple question "Am I still the best CEO for this company at this stage?" If and when the answer is "no" there is much to be gained by proactively leading the charge to find the best person and having full and frank discussions with the Board about where you can best continue to add value.

I disagree with Kerbel and Pardner.

VCs are entirely driven by IRR. That is understandable. But founders are not. In my experience--and I have been a successful VC, entrepreneur and even an EIR--entrepreneurs are looking for many things when they start a business. The worst of them adopt VC-speak and talk about exits and a smaller piece of a bigger pie. The best have started companies to build products they care about, create a business they love, have the freedom to make decisions, etc.

It is CRAZY for a founder to be cheery about being forced out of their own company. Kerbel in particular is wrong: 99% of entrepreneurs are in it for more than just the cash. That is a VC perspective, but it is simply not human reality. Real people have dreams, egos, aspirations. They are not IRR machines.

My biggest beef with the VC business--and this comes from a guy who has had a very successful track record--is that VCs are not straight with entrepreneurs. They know it is not in their interest to disclose the reality. (If you want to know the reality, read a sample term sheet: what can be done, will be done.) The whole VC PR machine creates a false picture of reality, and the business press buys it without question. Founders that got screwed or squeezed are usually afraid to speak up. The result is that more entrepreneurs get led to slaughter, sweet-talked pre-deal and canned post-closing. VCs talk about BS like "a great CEO knows when it is time to get someone else" and "5% of $100 mil is worth more than 100% of zero", and--my fave--"don't worry about dilution" (cool, I always think: then you VCs take out YOUR anti-dilution protection, too. No?). Jayzus, my head spins.

I left VC, and I left tech startups. I got sick of the BS: saying it and hearing it. If you care about more than making VCs rich, taking VC cash is not the place to be. I just wish more VCs would be honest about the reality, instead of pushing their propaganda. Most entrepreneurs don't understand the financing deals, and they don't realize that they will be canned or marginalized. Their board seat will probably go away, and the new management team will get lots of stock that will dilute them. Freedom to manage? No. VCs write in so many clauses in the shareholder agreements that they have negative control of the company.

I could write for hours. I have been around the biz since 1997, and it is so full of BS and naivete that I get angry just thinking about it.

Founders: don't be afraid to bootstrap. VC is no panacea. Believe me. If you take it, have your eyes open and a bottle of lube close to hand.

EP - If I may call you that,

Kudos to you on your success in the venture world.

I think that you hit the nail on the head with your suggestion that founders bootstrap their company.

Having said that, if a company is going to play the VC racket, they should be well aware of what they are getting into and what the game is, because after all, it is just a game. Part of the game, for most founders, as nasty as it is, is the golden rule (as he who has the gold, makes the rules).

Saying that most entrepreneurs don't understand financing deal is just a red herring. Can't imagine that there are many VC firms that will fund a company without the company getting ILA on the deal.

Building a business is rough no matter which way you try to do it. While the entrepreneur may not be in it just for the cash, they have to be aware that their new partners (the investor) are..........and they just gave their new partner the ability to do something about it if the cash doesn't materialize.

An excellent topic. One that touches on my current and previous experiences.

Presently in the process of developing an advisory board for a small and successful 2 y/o solid state lighting company- we continually come back to the questions of founder-executive personal and professional development trajectories. Founder positioning scenarios as the company scales and the self-neglect that sometimes creeps-into founder-executive lifestyles and career planning.

I must admit that in my private company board and advisor board experience VC board members and founders alike have a difficult time framing discussions around founder professional and personal development. Sometimes competitive personalities are uncomfortable making room for the vulnerability these discussions require. Many other factors play a role as well. Business personas sometimes don't match what is under the hood. VC's/CEO's alike are involved in spinning their own PR process; hidden agendas exist. With high stakes there is, at times, dire fear of seeing and being seen clearly.

In my opinion the CEO needs to have a Personal/Peer Guidance System(PGS)personal or peer board of directors that he can speak to honestly. This board has a clear charter at the intersection between the individual leader and the corporation. It serves only the CEO. A board comprised of a well chosen peer, advisor, or three who are capable of being candid with the CEO and are not conflicted by other economic interests.

In start-ups and early stage environments(where it is arguably most critical)too little emphasis is placed on coaching or grooming younger CEO-founders to intentionally develop the very guidance systems that will help them make the best choices for themselves and their companies as they transition from the jungle, to the dirt road, to the highway and beyond. So often improvable founder personality quirks and professional blind spots render unscalable and unfundable what might otherwise be a successful enterprise.

-As a young CEO for a small private company, I spent three months after exiting my first start-up soliciting a 360 on myself as a GM with current and prior staff. During my tenure I simply did not know how to and was not encouraged to structure a professional support and review system for myself. So much of the time I really didn't know what I was doing- I did guess right once in a while. During my post-exit 360 I learned things about myself that other people had known literally for years (important knowledge I had never asked them to share). Had I the maturity, insight, know-how, and self-awareness to develop my own (PGS)Peer(or advisor) Guidance System my own personal, professional, and corporate development would have been well served.

To my mind, an honorable characteristic of being a great leader includes being capable of creating other leaders. Our leadership creation engines (start-ups) often have faulty leadership support and development systems. As an entrepreneurial society, which America is if anything, we are better at financial capital creation than we are leadership capital creation.

The VC has a unique contribution to make in this regard- that is, room for improvement exists. For many understandable business and other reasons, too often, I believe, it is an investment the VC is reticent or ill-suited to consistently make.

I welcome your thoughts.

-Tim Smith
Boston, MA

Wow - great post and even greater comments! I'm hooked.

I agree with Tim!
This is a great post.
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Good work keeps it up!

Jeff: I remember you telling me the story of the jungle, the dirt road, and the highway when I pitched you a few years back. :).

You’ve managed to explain a really tricky subject well. I find that I sometimes have difficulty in getting my head round topics like this, but you’ve summed it up really well. I’ve found another writer that does the same thing although don’t have the details right now.

It is CRAZY for a founder to be cheery about being forced out of their own company. Kerbel in particular is wrong: 99% of entrepreneurs are in it for more than just the cash. That is a VC perspective, but it is simply not human reality. Real people have dreams, egos, aspirations. They are not IRR machines. - Sad but true.

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