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September 07, 2006

Comments

So basically, what you're saying is :

1) You will only invest in companies that are established or have a patent.
2) You will not get involved into the activities of the company or have your own management there.

I don't see any risk here... good thing you call yourself a "VC"!

i think that you're missing a critical element in the mix. it took me a while to figure out (i'm a 3-time vc-backed ceo) that most of the time i hold most of the cards. things can get very very ugly, but at the end of the day, the company is nothing without the management just like it's nothing without cash. vcs often think that they hold all the cards - the golden rule: he who has the gold rules - but it's not true. in my experience, things work a lot better when both parties recognize the fact that they are both powerful and both dependent on the other.

Good points. I was not very clear on setting up the article. I was trying to impart three points:
1) the focus was not to say VC's have all the power, but to help entrepreneurs understand what is the key leverage point that VC's do have and to correct the assumption that it lies in % ownership.

2) an investment is a partnership between the CEO and investor. Each has a role and their success is mutually linked. When one side or the other uses force (legal, financial, etc), things begin to unravel. The CEO's greatest leverage is that he/she is core to driving the company strategy to success.

3) VC's need to bring significant value to a deal. However, this includes making introduction, providing counsel, helping identify recruits, assisting in raising money. When the VC overreaches and starts backseat driving, there are too many cooks in the kitchen (and it alienates the CEO).

Matt:

very good post… glad to have helped inspire it! I definitely agree with Lucinda's comment, but would put a slightly different spin on it.

Its not that VCs can't fire management, but rather that finding new management that is as knowledgeable about the company, industry and as passionate as the founders is pretty tough. Counter examples do exist but generally speaking founders being asked to leave a startup is an option of last resort.

A question for you:

As a VC, would you ever invest in a company where you knew that you wanted to replace the CEO asap, but weren’t open with the founding CEO about this?

This strikes me a recipe for disaster and I suspect the answer from 99% of investors is a resounding no.

-Andrew

Spot on. Life is too short to back the wrong teams & leaders. It's not very ethical to go into a deal without putting everything on the table. We have never made money on a deal where the CEO transition has been forced. They are too central and the companies too fragile.

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Mission

  • For many entrepreneurs, the venture world is needlessly opaque and confusing. Venture capital is both art and science with karma mixed in. With a synchronistic twist, this blog will try to shed light on the world "behind the curtain" as well as how key entrepreneurial lessons are mirrored in everyday life.

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