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Very Early Stage Technology Investing

Archive for the ‘Governance’ Category

Five not-so-glamorous roles of the Start-up CEO

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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.

Written by Mike Venerable

March 18, 2012 at 8:30 pm

Build a Board You Don’t Deserve – For Entrepreneurs

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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.