At CincyTech we manage a broad portfolio of seed to venture stage companies, about 32 active today. When we started five years ago we expected to make 4-5 investments per year, so we should have about 20 at this point. Oh, well. After the downturn of 2008/9, we had a bolus of quality deal flow across our four sectors of focus. In a community trying to build a robust start-up ecosystem we made the decision to accelerate our investment pace, with the expected complications and increased workload.
Today, with the same size team (albeit with some new members) we expect to do 8-10 new investments per year, so the inevitable confluence of old and new company needs hit hard in the past few months. It didn’t help that we were in the midst of fund raising for our next seed fund. In some cases the needs were driven by companies maturing, in others companies were reaching inflection points, in others we were bringing on new management. Since each company is an independent experiment unfolding on its own schedule, there is little we can do but amp up and ramp up our activity accordingly. Of course similar cycles of feast or famine occur in an early stage company.
My own fatigue got me thinking about founder’s fatigue. I am always looking for signs of founder’s fatigue among our companies. It may be a fleeting condition, but left undiagnosed and untreated it can lead to a death spiral for a company. It’s curable in some cases, passes like a stubborn cold. But in other cases it means it’s time for change. Symptoms of founder’s fatigue included:
- No Bad News – An early stage company is a work in progress and the founder’s gift is often the ability to learn and adapt quickly. I expect each start-up to adjust in ever smaller increments as it moves from concept to company. Those adjustments are driven by bad news and negative feedback. Frankly, start-ups are nothing but negative feedback collectors in the early years. Market resistance, product short-comings, talent retooling and fund-raising rejections are all part of the learning. Eventually a founder may become numb to bad news, and it may happen just as the light appears at the end of the tunnel. When a founder quits collecting and applying negative news to drive change in the business it may be founder’s fatigue.
- Flat Metrics – There are natural growth plateaus in any high velocity business. Flat metrics are not always a sign of founder’s fatigue, but it’s possible. Flat metrics mean the company is operating at some level of equilibrium, and that is unacceptable in a start-up for more than a few measurable periods. For mature companies it may be a few quarters, for early stage companies it may be only a few months. A high growth company CEO needs to be on guard for equilibrium. Early warning signs (canary metrics) should trigger a healthy fear in the founder. A founder who is not reacting to flat metrics may have reached a level of passivity born of fatigue. Often times the founder who built revenue to a plateau is unable to sort out how to reach the next level. It can be a surprise and it is often necessary to work through the issue with the team and board to see if it’s time for a new infusion of talent or a new leader.
- Stale Talent/Relationships – As companies grow and progress against the challenges of being a new market entrant, the need for talent and partnerships diversifies. A founder needs to be challenged at all times. The first sales rep is rarely the sales leader that will blow the top out of the forecast. The original programmer that built first product in the basement is rarely the CTO with the chops to help raise the A Round. And the accounting firm run by your brother-in-law is not the one you need to get ready to go public. It is the founder’s job to continue to grow ahead of the business or bring in a CEO. Those are the only choices. Either the founder wants to take on the CEO role and step up to the complexity of that job, or not. A lot is at stake, and the consequences of mistakes grow as the company grows. If the founder is not bringing these relationships to the table, not looking to grow ahead of the business, it may be fatigue.
There are, I’m sure, other signs of founder’s fatigue. But the most important thing to do as an investor, board member or mentor is to be proactive. There is nothing quite like carrying around a payroll and vision on your back everyday. I did it for five years and it was exhausting. We have founders in our portfolio who are at five years plus and continue to answer the bell. Treatment for founder’s fatigue is simple. Talk candidly and directly about it. Most founders have the integrity and clarity of mind, once asked, to think deeply about their role and the right path forward. I find that most of the time the issue is just exhaustion aggravated by isolation. It is easy to get walled in by the burdens of the company, and many founders will try to bear the bad news alone or by wary of sharing it with others, especially investors.
So practice open, transparent communication between the founder and the investors. Everyone needs to be comfortable talking about bad news, canary metrics, management, customers, cash burn, gaps in talent, issues with product or anything that is material to progress. And founders should be open to change, up to and including finding a new CEO, if the fatigue is persistent and damaging the business.
Tech company founders are typically product centric visionaries. Saddling a founder with the real-world duties of a growth company CEO is actually a good way to slow a company down. It is possible to be the product visionary and do some of the not-so-glamorous roles early in the company’s development. But the degree of difficulty required to bring a new product to market is very high. I’d say failed seed companies outnumber successful ones by 100+:1, and those that reach sustainability and a successful exit are rarer still. So the founder/CEO faces a dilemma. Either take on too much, off-load product responsibilities to someone less passionate, or find a more business-oriented bookend. The bookend brings orthogonal skills to the company that either the founder/CEO doesn’t have or can’t execute while still managing the product. Or the bookend can bring passion to the product and free the founder/CEO to execute the other roles. Either path is possible, and the founder can choose. But first founders should think about how much they want to chase these tasks on a day-to-day basis. My top five not-so-glamorous roles (not exhaustive) are:
- Chief Fundraiser – Raising money for the company, sweating the budget, meeting and managing investors, building out the business model, all belong to the CEO at least through the A Round. At that point you might have enough money to bring on a CFO, but until then the CEO owns this grinding task. Early on a founder can lean on a strong lead investor or board member for mentorship, but if a founder wants to be the CEO this is job one. Not taking responsibility for capitalization is a disqualifying characteristic of any prospective CEO. I know of no company that has successfully grown and prospered without a CEO that takes this job on as a solemn responsibility.
- Chief Talent Officer – New companies need talent. Talented people with serious life responsibilities are wary to take on a start-up job for good reason. Many fail, run out of money, pay below market compensation, have few benefits and demand more from everyone. Start-up cultures can be as bad as big company cultures, whether things go badly or go well. The CEO has to be able to attract people to do something that is most likely not going to work out. This requires a combination of competence and confidence, but not arrogance. Employing people is another solemn commitment to do all that is needed to capitalize the company, operate with integrity and give best efforts. It is akin to guiding someone up Everest. While everyone expects risk in an early stage company, they are more likely to respond to maturity and experience than exuberance.
- Chief Compliance Officer – The CEO is responsible for knowing the legal, ethical and regulatory environment the business operates in. Investors, employees and customers all have legal rights and those must be recognized and protected by the CEO. Products have regulatory and ethical constraints. Privacy, safety, age appropriateness and any number of other laws and policies may apply to a start-up. While the CEO can employ consultants and lawyers to ensure all is well, there is usually not much money to do this up front. Just knowing what the applicable areas of regulation and policy are in play is the CEO’s responsibility. Painful, boring and tedious tasks indeed.
- Chief Economist – The CEO owns the macroeconomic and microeconomic monitoring for the business. First the CEO must watch for positive and negative elements of the macroeconomy that require planning or adjustment. Many companies bled out their capital in 2008/9 because they waited too long to cut spending, as an example. In addition to the macro picture, the CEO must know the target market inside and out. The CEO should have deep experience and a broad network of sources in the market where the company competes. Trends have shorter half-lives now, and customers are increasingly fickle. Running a start-up requires continuous course corrections based on inputs that feed product plans, distribution strategy, and many other operating decisions. The CEO must be in touch with the broad economy and the market segment, synthesize the data and make appropriate decisions. This is a role that also requires objectivity about the company’s product and past strategy.
- Chief Urgency Officer – Urgency is required in all start-ups. Different from rushing, urgency implies intelligently acting, learning and adjusting. By nature the introduction of a new product consists of a critical path of actions, recalibration based on feedback, and then restarting again along an adjusted path. Each stage must be executed with urgency, but can’t be rushed. Rushing means missing data points and learning little if anything from a series of actions. Just as dangerous is spending too much time imagining what the market may want, building it, and launching it as the company runs out of money. Pace-setting inside the start-up is a critical job and one that will requires being the “decider”. And being the decider can lead to being wrong.
The Hollywood view of the start-up CEO is one of glamour, wealth and fame. This rarely happens. I have a bias to founder/CEOs, so I’m not advocating that all founders abandon that path. Rather, I think it is more important that everyone involved is aware of the heavy burden of work that is shouldered by the start-up CEO. The unglamorous roles must be filled and the over-worked founder/CEO will rarely pull all of them off while also driving a great product vision or leading a development team. Backfill or front fill the position. And for founders, I would ask that you examine what feels the least like work to you. I find that I can work with more passion and energy when I don’t feel like I’m working. That zone is where people create the most value. Make a conscious choice to pursue one path or the other and share that with your investors and team so they can help you find the appropriate bookend.
Today was a great day for our portfolio company AssureRx. The company won the 2012 Luis Villalobos award at the Angel Capital Association Awards in Austin, Tx. Don Wright, COO, attended and accepted the award. CEO Jim Burns was back home in Mason, OH to lead a board meeting. The company represents a great example of the Seed+ approach we take at CincyTech. The award recognizes the most innovative idea funded by a member angel organization, and AssureRx’s wide syndicate included the Ohio Tech Angels, North Coast Angels and Cincinnati’s own Queen City Angels. These groups were key syndicate members for this company and are very active in Ohio.
AssureRx applies phramacogenetics to the field of behavioral health. The lead product helps behavioral health professionals make informed decisions about a patient’s medications based on genetic information. Since so much of psychiatry is now driven by therapeutic treatment, the market is craving information about how best to apply a growing number of drug choices to individual patients. Based on technology from the Mayo Clinic and Cincinnati Children’s Hospital, the company has more recently attracted investment from Claremont Creek Ventures and Sequoia Capital. But we would have not transitioned from struggling start-up to a well capitalized, fast growth company, without a remarkably broad and patient syndicate. Angel groups and individuals helped sustain the company through difficult times in 2008/2009 as we retooled management and built the technical and intellectual foundation to successfully launch our first product. That support made all the difference.
In our portfolio, in addition to organized angel groups, we have nearly 100 individual accredited co-investors helping us fund more than 30 companies. Each syndicate is a bit different, but I am heartened by the continued growing interest in seed/early stage investing. This participation is driving sustained growth in seed stage investing even as the venture industry retools and contracts. Funding early stage innovation with broad networks of individuals is an amazing competitive advantage we have as a nation. There is no such structure in Europe and Japan. China and India, however, have a growing network of angel investors who are aggressively seeding new ideas. We can expect increasing encroachment in the field of innovative growth companies in the near future.
In Ohio there are solid state programs that help move individual capital into early stage deals. First, there is a compelling state tax credit that is awarded when someone invests in a technology-based start-up. The application process is not terribly painful and the refundable credit is a nice reward for an investor. In addition, the state has provided matching investment dollars for several angel funds in the state, including those listed above. This co-investment has helped dramatically increase the amount of organized start-up capital in the state which is driving increased company formation. As the funds achieve critical mass and generate returns, both individual and state money has a good chance of being recycled back into the early stage gap. Extending the tax credits and thinking of other inventive ways to entice capital off the sidelines and into local companies would be a good policy for all states to adopt.
Recently, while sitting in a board meeting, I realized the answer to a question I often get: ”If you could tell a founder only one thing, what would it be?” It’s rolled around in my head the last few weeks, but the board meeting clarified the answer for me: Build a board of directors that is so good that you are embarrassed to have them spending time with you rather than solving bigger problems. Building the super board also forces the you to confront many of the common flaws of the entrepreneurial gene, including introversion, hubris, concept narcissism, avoiding detail, risk addiction and selection bias.
You begin to form the super board as you prepare to take outside money that amps up your own personal responsibilities to others. Taking other people’s money (OPM) is a big step in the entrepreneurial path. Spend some time thinking about what type of people you want on your board post-investment, reserving a couple of seats for investors in the seed stage. We like to see boards of five members when we close a seed round, consisting of 2 common seats including the CEO/founder, 2 investor seats, and an independent director chosen by consensus.
This may seem programmatic, too constraining to meet the super board goal, but a good board is built in stages, and this is Stage I. Prior to investment founders should be thinking about this post-seed end state and focus on the extra common seat and the independent seat. These will be hard enough to fill. Let’s set the common/independent seats aside and address the investor board members. In seed stage investing look for experienced entrepreneurs with investment experience and institutional seed stage investors affiliated with a fund or group.
An experienced entrepreneur likely has had success and failure in their past, able to balance high expectations with the up and down reality of building a company. The institutional seed investor will have broad market context and exposure, which means a lot when raising capital in good times or bad. You always need a board member that sees more in your space than you do. Your syndicate may include other investors, but you need the ones on the board who are able to roll up their sleeves. Remember that investment terms constrain much of the decision making of the early stage board, so there won’t be a lot of cliff-hanger votes in the board room. The Stage I board is a working board with governance responsibilities. As the company matures the level of work becomes more governance related.
We can assume that the investor board members will have high expectations and hold you accountable. The common board representative really has the same responsibility. And if that is you, remember that you are a shareholder now, not some lone wolf founder pursuing an unproven idea. You’re path to wealth is irrevocably linked to building enterprise value, nothing else. As one of the common reps – CEO or the other common seat if you have a hired gun – you must separate your founder ego from your board responsibilities. Even as the CEO you have to make this transition in thinking to realize the full potential of the company. It will require creating an objective partition in your mind that is fed by outside information. And this outside information first comes from your super board.
So we can now fill out the Stage I super board with an independent who gives the company something it can’t afford yet. Maybe that’s great access to customer decision makers that are beyond the reach of other board members and founding employees. Often this seat is used to bring in a world class technical or scientific founder to supplement the internal team. You are looking for someone whose level one LinkedIn network includes a ton of people who can either buy or validate your product. Then you need to actively convince the candidate that you are committed to building something compelling, worthy of their time. Everyone else on the board is vested in the company, but the independent is investing time, reputation and access usually for a modest amount of illiquid options. Harder to find.
Assuming you find a good first independent, you’ve now assembled five people who are stakeholders in the company’s success. They should be leaning in at this point, and if you’ve chosen wisely you’ll be pressed by the board to work outside of your comfort zone, embrace accountability and grow professionally. You can also add another independent if you identify another gap to address, but don’t build a big board prior to raising venture capital, which will complicate the Stage II board. Expect to be challenged, and if you feel like you are coasting, shake up the board in some way. Sometimes just brining in a new member or observer will raise everyone’s game. I sit on a lot of boards and I board can become stale. I try to roll off in those cases, bringing in a replacement that can stimulate new thinking.
Building this great Stage I board, even though it seems like a small task, is the first step to demanding more from yourself as you transition from struggling entrepreneur. The path to first capital is grinding and can build habits that the founder/CEO needs to shed quickly. The loneliness of the embryonic stage of creating the new company must give way to the collaborative task of bringing it to market. You must crave scrutiny and fear what you don’t know to be successful. Recruiting the super board is job one.
The book Island of the Lost describes the trials of different groups shipwrecked on Auckland Island in 1864. Auckland Island lies in the Southern Ocean, more than 250 miles south of New Zealand. The first stranded group of five men were led by Captain Thomas Musgrave, who rallied them to face the relenting hardships of survival on the uninhabited island. They survived and eventually were rescued, but only after improving the wreck’s dinghy to take three members to Stewart Island, an inhabited island much closer to New Zealand. From there Musgrave was taken to Invercargill on New Zealand’s South Island. Once there he raised funds to hire a boat that eventually rescued the two crewmen left behind because of space constraints in the dinghy.
The second ship to wreck, four months after Musgrave’s Grafton, was the Invercauld. While the crew was larger, they were able to salvage little of value from the remnants of their vessel. Moreover, they lacked a competent leader and a team of versatile, committed seconds who could apply their varying skills to the tasks of survival. There were adequate resources, but only three survivors were rescued when a Portuguese ship stopped at the island a little more than a year after the initial wreck. These included the Captain and the First Mate. Others may have survived elsewhere on the island, there were hints of cannibalism, and the outcome was entirely different than the Grafton.
The book is filled with fascinating details of what befell each group. The account confirms that leadership and team performance were the key factors in the outcome. Musgrave was a demanding, willful leader who expected much of each surviving crew member and kept them fully engaged. He even organized classes to keep them occupied. Captain Dalgarno of the Invercauld is overwhelmed by events, fails to keep his team together, and cares little for the well-being of others. Musgrave knew that under duress, when everything was at stake, leadership requires incredible will. His refusal to accept failure drove a common resourcefulness from all of his crew. These are the intangible qualities of a great leader that drive the performance of a talented team.
Reading these and similar accounts provides context for us all. Little in our coddled, modern existence compares to the deprivations faced by the Grafton or Invercauld crews on Auckland Island. Their day-to-day 19th century lives before the wrecks would have been unbearable for most of us. But the examples are instructive nonetheless. The most successful early stage companies include leaders and key contributors who are deny failure. They expect to succeed against the odds, and they expect to do something meaningful and compelling. Yet their willfulness and competitive spirit is rarely coupled with arrogance or conceit. The great leadership teams understand that working at an early stage company requires a common commitment to the task, not a command environment. Successful founders will not be outworked, and they recognize the importance diverse skills and perspectives. They also understand that the end goal requires continuous adaptive learning and adjusting by everyone.
There are some other almost contrarian traits that define a great leadership team. First, good teams don’t seek too much time in the spotlight. The product is what matters first, and success will provide ample opportunity for exposure, even gloating if you wish. Good teams know this and see their customers and partners as the stars. Second, they represent orthogonal skills that create valuable tension in the early stages of growth. Having a great sales leader will make the engineering and marketing leaders stronger, as each pulls on the other to excel and meet commonly held high expectations. A great founder will thrive in an environment of competing seconds, learning from their experience and exploiting their talents to build a successful company. Finally, good teams have a shelf life. They naturally break-up and move on when the company no longer feels like a fit. One of the reasons many fast growing companies plateau after an exit is the natural pause to recalibrate the management team. The energetic group that drove growth is not only flush with liquidity, but also knows that the fun is probably over. Often the founder stays around and continues to succeed, but growing in the single digits is a different challenge than growing at 50% per year.
Founders should think about the journey they have started in this context. I find the most compelling entrepreneurs are those that think big, crave scrutiny and knowledge, seek to surround themselves with talent, and have a realistic expectation of how difficult the journey will be, whether it leads to success or failure. In fact, I think that was the secret of Musgrave’s success. Unlike the other Captain, he knew that whatever remained of his crew’s lives, surviving and striving to escape Auckland was in its own right a form of success.
Twenty years ago there were no accelerators, no place where good ideas got hands-on attention from mentors and investors. That was not ideal, but I think we are going to sail past the optimal number of accelerators pretty soon. Accelerators are as good as their networks of mentors and investors, feeding in early deal flow and providing the in-school and post-graduate support that every start-up needs. We are fortunate to have worked with The Brandery since they got started two years back. The founders had great networks, brought a novel theme that matched our region and their expertise, and took the time to study and join the Tech Stars network. By focusing on consumer digital companies they were able to bring real value to applicants selected for the program.
They have built a Top 10 accelerator that serves a distinct national audience in their sweet spot. Much like Y-combinator and TechStars, geography is not the dominant driver for participants, but rather the quality of the network. A lot of new accelerators are on this path as well, like Rock Health in San Francisco. Again, another great network and focus. I think these accelerators in the end will produce the most value for selected companies. Other accelerators that have a geographic focus – these are sprouting up all over – are serving an important role in their communities, but I don’t know how many we need before the system is extracting deal flow for the sake of filling accelerators.
Let’s run some simple numbers. A few years ago there were a handful accelerators producing fewer than 50 graduates per year. Now there is at least one per state on average. In Ohio we will have 4 or 5 of these by 2013, so we’ve got Wyoming and Alaska covered. That means Ohio alone will produce as many graduates in 2013 as the system did a few years ago. Our experience working hands-on with graduates is that there is some abandonment, some funding activity and some companies that enter “not funded/not giving up” stage. I’m pretty sure the system will produce more than 500 total graduates in 2013. What do we do with all of these graduates? While seed stage funding efficiencies are improving, the system is not geared to absorb that many new entrants. Some accelerators are now building a funding path for graduates that is more secure, but I think they should be careful not fund everyone at selection. Some of the ideas won’t survive the program and remain worthy. Some teams will break up or punch out. Not everything that comes in the front door is fundable. Regardless, the benefits of high value accelerators – scrutiny strengthens ideas like nothing else – for seed stage investors are clear. We benefit from aggregated deal flow, a growing pool of mentors and co-investors to help condition and steward companies, and graduating companies that are much smarter and better connected from the experience. There might be some that don’t make the journey, but the ones that do are in far better shape for the experience.