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Very Early Stage Technology Investing

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Symptoms and Treatment of Founder’s Fatigue

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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.

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Written by Mike Venerable

April 24, 2012 at 9:56 am

Posted in Uncategorized

Jerks and Venture Investing

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Investment transactions are naturally fraught with tension.  It is hard not to decline to invest in more than 90% of the opportunities you review and not be accused by a fair number of people of being difficult.  It’s certainly happened to me in the last few years.  And, I’ve certainly felt that way myself when trying to raise capital from VC funds.

Investors say “no” for many reasons, and learning not to take it personally is critically important.  First, the “no” might have nothing to do with the company and everything to do with fund dynamics, timing, sector focus, or a competing investment.  You should try to weed these things out before engaging a venture fund, but it is sometimes not always clear.

Understanding a fund’s investment criteria is critical.  Venture investors look for companies addressing very large markets ($$ billions).  They also look for unfair advantages, either from intellectual property or market/customer understanding that is clearly superior.  If you get a series of “no” answers, take time to assess the idea/company and ensure that you are talking to the right kind of investor.  Many angels prefer to invest in companies that may never require venture investment.

Most investors are not jerks, but dealing with competing opportunities and priorities can make for difficult decisions and harried days.  I don’t want to excuse bad behavior.  Venture investors should be reasonably transparent about process, so that you know where you stand.  Meetings should be cordial, candid, and run by a senior person.  Nothing is worse than showing up for a meeting and getting grilled by the summer intern.

Actually, having participated in probably 200+ venture meetings in my career, I have known only a few that went down an unpleasant path.  One was driven down an unpleasant path by the founder, who was misrepresenting another funds term sheet to another firm who knew he was being dishonest.  They simply ended the meeting and walked out.  Another was caused by two partners carrying on a side conversation during a full-partner pitch.  The conversation was distracting and disrespectful in the extreme.  The presenter ended that meeting.  The last was when someone came back to our fund with clear knowledge of our process and requirements, but simply ignored them and asserted we needed to make a decision that day.  I ended that meeting.

In the end the best way to avoid misunderstandings in an inherently tense process is to prepare for candid feedback.  Many of the people that tell you “no” will also volunteer advice and referrals that will be of value going forward.  You’ll undoubtedly meet some jerks along the way (I’m not immune to that accusation), but try to separate the answer from the person.  And remember, everyone has a bad day now and then.

Written by Mike Venerable

September 10, 2010 at 1:38 pm

Posted in Uncategorized