The parent trap | Investors and entrepreneurs may not see eye to eye when it comes to raising a corporate child
As venture capitalists, we trade capital for ownership interests in small, privately-held companies. We typically buy 20%-40% of the company and a seat or two on the board of directors. We help build value by working closely and actively with fast-growth companies. We mine our experience, networks and brainpower to provide a mix of strategic, financial and business development assistance. And beyond the capital we provide, our experience and networks coupled with our commitment and energy will determine how useful we are to our business owners and partners.
After months of due diligence, if we like the company, we take the plunge and get hitched. We’ll see each other regularly, if not frequently, and talk about how we’re doing. We’ll try to figure out whether we’ll do as well as we’d hoped when we talked about our life together. Like most marriages, there’s a honeymoon period followed by the continued mutual discovery of the things we didn’t know about each other when we took our vows.
But in this relationship, the investors and the entrepreneur often aren’t equals, both economically and in terms of key strategic decisions. The investors often join the board of directors and spend time understanding, counseling, coaching, advising and, at times, directing the new company and its founder.
And here’s where it can get tricky: Investors, along with other company directors, are apt to make changes if things are not going as planned, so as to optimize for success. For example, if the company’s leader isn’t able to make the business perform, the directors may decide that a new leader needs to be brought in to keep the company heading in the right direction. This can be a complex and difficult transition, as the leader rarely shares the view of the directors, even if he has not met the plan. Leaders tend to have some real or perceived reasons for the failed performance and tend to be biased — understandably — toward giving themselves more time to “catch up” on the missed plan. While one can empathize with this emotional response, a responsible board needs to make a sober and dispassionate judgment about what’s in the best interests of the company.
Time for a change?
As an investor and director with more than a half-dozen companies, I am continuously evaluating the development of the founders and managers in my portfolio. It’s often said that by the time you realize you need to change management, it’s probably too late. As a result, investors watch for telltale signs, from entrepreneurs repeatedly diverging from the business plan, turnover among employees and/or internal conflicts. If we catch these clues early enough, there’s a greater chance that we can try to fix the problem before the company exhausts its cash, staff or both.
Making changes to the original team is one of the most challenging things a company director can do. That said, not acting often results in a company’s failure, losing not only investors’ capital, but also affecting the jobs and careers of the company’s employees. Directors at private, venture-capital-backed companies take the same perspective toward assessing management’s competency as their equivalents at publicly traded companies. Done well, the transition can and should be very positive. And while it’s rarely a straightforward process — after all, entrepreneurs of fast-growing companies aren’t often without egos or emotions — a change in leadership is a relatively normal transition in the life of a fast-growing company.
Indeed, the entrepreneur who created the company often finds that they aren’t the best person to take the business to the next level. Skill sets required for success are very different once a company moves from inception and early development to commercialization and expansion. And the same entrepreneurs that started the journey must hand the developing company to more experienced hands to grow it into a self-sustaining company.
The message here is to recognize the limits of your experience and take a big-picture perspective of your growing company. While the venture capital relationship isn’t about transitioning the founder out of the company as it grows — though that happens — it’s also not about ensuring job security for you or your team. Our shared objective is to see the company succeed by removing what risk we can jointly identify as standing in the way of that success.
Just as parents need to evolve with their children’s growth, so too must a company’s parents — its founders and managers — evolve to meet the needs of their fast-growing baby. As a company’s founder, it’s critical that you gain the proper perspective on what’s happening, and to prioritize what’s best for the company over what you may feel is best for you. If you can think of handing the company off to another leader as an evolution rather than a demotion or failure, you and your company may be able to continue to benefit from what you have to offer — even if it’s not in the way you’d thought. So, if you are faced with this kind of transitional moment, don’t be a baby — be a good parent and do what’s right for your kid!
Michael Gurau, managing general partner of Clear Venture Partners in Portland, can be reached at mg@clearvcs.com.
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