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2 posts from July 2005

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.

July 03, 2005

Dr. Seuss and The Land Of No

Having three kids causes one to read alot of Dr. Seuss.  Over time, I have come to the conclusion that Dr. Seuss would have had great fun describing the world of Venture Capital.  From the vantage point of most entrepreneurs, the VC world is the "Land of No".  At my small firm of three (now four) general parters, we see thousands of deals every year to invest in a handful or two.  That means we say no 400-500 times for every time we say yes to a prospective investment.  Other firms have similar ratios.  Entrepreneurs are typically the optimists who figure out how to turn anything into gold.  VCs are the pessimists who figure out all the ways a piece of gold could become worthless.

Back to Dr. Seuss.  Imagine a conveyor belt with packages of all different shapes and sizes in front of a row of fresh-faced, horn-rimmed glasses-toting, 30-something MBAs with khakis and blue buttoned-down shirts ("VC weenies").  The VC weenies peer into every package as it goes by and simply intone, "No".  Invest in a blue-horned Skreet?  "No".  A buck-toothed Blahrg?  "No".  A callow, MIT PhD with a wireless start-up?  "No".

Suddenly, something in one of the packages catches the eye of one of the VC weenies and they grab the package and shout "Yes" and run out the door with all the other VCs chasing after them.  After all, once one VC decides something is worth investing in, it seems as if the rest follow.

So what are the things that make a new-fangled start-up appealing enough to appeal to the VC weenies in the Land of No?  The five that I hear about the most are as follows:

1. Know who to back, back who you know

VCs like to invest in people they know.  That's why they're always out networking at events or (so I hear) on the tennis court or golf course.  They like to get to know the entrepreneurs and feel comfortable with them before they invest behind them.  Investing in strangers is bad business.  Investing in entrepreneurs that the partnership has designated as "money-makers" or "backable" is the preferred approach.  A close friend of mine was an unknown start-up CEO a few years ago who couldn't get funding and had to scratch and claw his way to a positive exit.  Now, as a proven money-maker who everyone got to know during the previous fundraising process (when they dinged him), he's running a hot company that every VC in town is kicking and screaming to get into - he's suddenly been declared "backable" by the community.

2. VCs invest in movies, not snapshots

When you see a deal as a VC, you see it at a point in time.  If the entrepreneur tells you that you have only three weeks to make a decision, the decision is almost always an easy, "no".  No VC nowadays likes to be rushed into a decision, and people prefer to see the company and team evolve over time (like a movie) as opposed to at a discrete point in time (like a photo snapshot).  If a team walks into the first meeting and outlines what they plan on achieving in the next two months, and then walks in two months later having achieved each of the milestones plus two others, it's very impressive and gives the VC confidence that the milestones they've laid out for the next two years will be achieved as easily.

3. Run experiments

Start-ups are like giant experiments.  You make a few assumptions, add a few ingredients and see what happens over time.  VCs prefer to invest in start-ups where the assumptions are clear, the experiment being run is discrete and not too costly, and where the outcomes can be easily measured over a reasonably brief period of time.  A new company that requires $20M and four years to prove out whether the key technical or market assumptions are correct isn't very fashionable nowadays.  Companies that require $4M and twelve months to prove out the three key assumptions, and then a well-defined set of milestones that will be achieved during the first phase of the experiment, are obviously far more appealing.

4. Show up with some orders

Entrepreneur:  "This is the greatest widget since sliced bread!"  VC:  "Really?  Who's paid what for it?".  An entrepreneur can claim whatever they want about how great their new invention is, but nothing impresses a VC more than showing up with some orders.  Even a company that hasn't shipped its product yet can show up with orders or letters of intent simply based on the "hope and buzz" of what they're building.  When a ten-person start-up shows up with six-figure contracts from mainstream customers, VCs sit up and pay notice no matter what they're doing.

5. Have an unfair advantage

The final item that is important to help break through the Land of No is having an unfair advantage.  Every VC asks themselves at some point in the meeting, what happens if a "fast follower" comes up with the same idea, raises more money and recruits a better team?  Does this team and this idea have in some way an unfair advantage so that no one could really replicate what they're doing to the same extent - for example, the world's best technical expert in this field, or the world's most relevantly connected senior executive?  If the answer is no, then the project is likely to be allowed to continue along the conveyor belt and out the door.

Those are at least my observations.  Dr. Seuss might have had a few others if he'd spent much time observing the VC business.  But then again, he was in a far more noble profession - helping entertain and educate our children!