Venture Capitalists: Not Always Aligned with Startup Team's Interests
In my recent book titled * Entrepreneur's Handbook: Strategies for Launching and Exiting Successful Startups*, I delve into the intricate relationship between startup founders and venture capital investors who finance their businesses.
To effectively perform their roles, it's essential for venture capitalists to come off as friendly and approachable. This amicable demeanor can sometimes lead individuals to assume they are establishing genuine friendships or that they can receive impartial, unbiased guidance from these investors. However, it is crucial for startup founders to keep in mind that their investors have a primary objective, which they prioritize even when offering advice.
I've had two experiences that shed light on this dynamic. The first was when seeking professional advice from a venture capitalist for career development, and the second was when an investment I was overseeing as CEO wasn't seen as a worthwhile investment anymore. These two instances crossed paths at the same firm with the same investor.
As a proficient multiple-time CTO, I was eager to acquire skills necessary to serve as CEO of an emerging startup. To build these skills, I required sales and marketing experience, as well as specific CEO abilities such as fundraising.
I had met a venture capitalist during a fundraising campaign for a previous company, during which I had contacted various top-tier Boston VC firms, including this specific investor's. I had aspired to lead the former startup as its CEO, but a severe case of imposter syndrome dissuaded me. To overcome this and gain CEO experience, I approached this VC for guidance. We had developed a rapport, so I asked him where I might acquire these skills most efficiently. He was delighted and suggested two portfolio companies with strong CEOs and excellent sales and marketing backgrounds with whom I could learn.
The first was a public company that specialized in video editing software, holding a 90% market share, and was seeking ways to grow by penetrating new markets. The second was a private company in pharmaceutical document management, having gone through five rounds of funding (series A to E) and struggling in the already-declining document management market. The venture capitalist recommended the pharmaceutical document management company without hesitation.
At this point, you should consider asking yourself how the venture capitalist's objectives might influence his counsel. If the answer does not align with your needs, reevaluate his advice keeping this disparity in mind and avoid blindly accepting his recommendations as if you were in conversation with an unbiased advisor.
I heeded the VC's counsel, opted for the pharmaceutical document management company, and assumed the role of its CTO and CEO-in-training. The venture capitalist, however, was not advocating for my best interests; he was solely focused on his investment concerns. I later discovered that the video editing software company – an already successful exit for the VC's firm – was being dishonestly sidelined in favor of reviving the struggling pharmaceutical document management investment. The VC prioritized his investment's salvation over my career advancement.
Unfortunately, I was unable to foresee the disastrous consequences of this advice. The CEO was dismissed within six months, leaving me without the necessary learning time. Choosing to step into the CEO role despite my inadequate experience, I was driven by misguided loyalty to the VC, the board, the employees, and even the customers – groups I had not had sufficient time to develop authentic bonds with.
Entrepreneurs and CEOs should stay vigilant for warning signs when offered CEO positions. If the situation raises questions about your compatibility as CEO, especially if it's your first time in that role, it may not be the best opportunity for you. In this scenario, the investors and the board share a singular objective, while your individual aspirations likely differ. Despite the appeal of taking on a leadership role, this may not serve your long-term interests; it certainly didn't for me. A more intelligent move would have been to decline the offer and pursue alternative ways to gain CEO training.
While I struggled to turn the pharmaceutical document management company around, the video editing software company found success in a related market, attained excellent stock performance, and boosted its market position. Despite fierce competition, they managed to maintain their leading position.
However, the pharmaceutical document management company continued to struggle, and a year after my appointment as CEO, the investor led the board in shutting down the company. This decision was made not because the company was no longer progressing but because the limited partner investment period had been exceeded, prompting the investor to write off the investment rather than invest further.
Startup founders and CEOs should remember that their investors prioritize financial gains over individual careers. Their warm personalities are professional instruments – not indications of genuine camaraderie. Despite listening to their investors, it is essential to analyze their advice with awareness of their motives. For the investors, financial considerations will consistently supersede personal concerns. When an investment experiences a setback, a friendly façade could fizzle quickly.
As for being eligible to join the Website Technology Council, one might want to check if they meet the eligibility criteria, such as holding a notable position in technology, demonstrating exceptional leadership capabilities, and fostering cross-industry collaboration and knowledge sharing.
Jothy Rosenberg, the venture capitalist I approached for guidance, suggested I join a pharmaceutical document management company to gain CEO experience. Later, I realized that Rosenberg's primary objective was to salvage his investment, not necessarily serve my best interests.
In the book "Entrepreneur's Handbook: Strategies for Launching and Exiting Successful Startups," author Jothy Rosenberg discusses the complex relationship between startup founders and venture capital investors.
