In my experience, founders universally struggle with two things: 1) raising funds and 2) trying to effectively manage the investors who agree to give them those funds.
The first company that I ran earlier in my career was PE backed two different times. I was a novice to investor backed boards. We didn’t love it and suffice to say that when we took the company ESOP after the second successful run for outside investors, management was thrilled.
But what I didn't realize then was that even though the PE guys (and they were guys) were tough on us and drove us to higher financial results (sometimes at the expense of innovation and services investments) that overall, they shared the same mission as management did. We were aligned around strong cash flow and financial gain, hiring top talent, taking a few loss leader clients, increasing performance, client and employee retention, bettering the industry and really – building a great company. They were proud of us when we achieved. And then, just like that, boom – they were gone! As long as we made decent returns for them, they took their gains and moved on.
I was thinking about this because for the last 8 years I have worked with start-ups, both in management and advising founders. Hands down, managing the board of a startup has got to be the most difficult part of it for a founder because they rarely have any experience at it. And it’s not just venture – seed money, angels – I’m looking at you! We’re all tough to manage.
So why is this? I can think of three possible reasons.
1. Missions are not aligned. In the simplest terms, early investors want to make the most money possible and in concert with their portfolio life cycles. Founders want to make the most money possible while building a great company. Fundamentally, early investors want and need to get out - they have an end game - and they hope for good multiples because they are balancing the risk in their portfolios. Founders on the other hand, want to build something they can be proud of and want to hang on longer because they believe that their valuations will increase with just a little more time. Investors have a lot of irons in the fire. Founders may only have one rodeo, so pressure to exit can feel artificial and counter to the company's longer term potential.
2. Investors think they are operators. Decidedly, they are not. They offer a constant stream of advice about how to do everything. They sometimes offer up advisers (who work for them) who may or may not be helpful. Oftentimes, their recommendations are right, but the difficulty for a new founder is that she has to run every idea up the flagpole before saying thank you, but no. Founders may not be strong on operations either, but the day to day water-boarding that active boards can put them through doesn’t help the situation. Founders are caught constantly managing idea-churn from non-operators.
3. Conflicted Boards: Board members of start ups wear two hats: they oversee management and they are shareholders. There are good reasons for them to oversee management – they help hire early talent, they review compensation, they look at financials – they make sure the company is on pace to achieve what the Founder promised. Founders need boards to wear a management hat now and then. But Board members are also shareholders (see #1) and as shareholders they can get emotional, didactic, unyielding on what they need to return to their investors and when. This can cloud management advice from even the most Founder-friendly investors.
What can be done?
1. Talk early and often. Early expectations need to be documented and aligned before term sheets are signed. What’s the expected time frame for exit and what will it look like? It’s crazy to me how many Founders take money without ever having this conversation with investors. What is a Founder really good at? Where does everyone agree she will need support?
2. Founder - accept what you’re not good at. Founders need to know what they don’t know and ask for expert support/mentoring/business guidance before it gets hoisted on them by worried boards. Egos need to be put aside. Founders need to know how to harness their specific and special power and understand how to do the things that only they can do – and delegate the rest.
3. Board – accept what you’re not good at. Boards need to fall back and stick to what they’re best at – not the how, but the what. Identify the specific blind spots early on and support the Founder so she can build confidence. What can the Founder expect next? How can the Founder create revenue and exit options early on? Your job is making sure your Founder avoids the major mistakes, but you have to sit tight and let them figure out the execution.
4. Separate church and state. Founders need to run tight board meetings with clear agendas that separate management reporting from shareholder issues. This simple division of topics creates the scaffolding for productive board meetings. Boards spend the most time on management issues, and that’s to be expected. But Shareholder issues are important too! They should be discussed openly and frequently so that when opportunities come, everyone can be quickly aligned to an outcome and have fun getting there.
