You’re Just the Founder
steveblank.com
steveblank.com
It works the other way too. People can and do remember kindnesses and gracious acts from those who do them out of sincerity because they care about the people involved, even in a business context. It is just such acts that inspire the best of relationships that can last for decades.
It says something fundimental about the VC, his attitudes towards the people he funds, e.g. how much he respects them, which is not very much.
Note the very important detail that this was a (very?) successful startup. Now imagine being a founder in one funded by this VC during a bad period (something much more likely outside of the dot.com bubble in which this happened).
You don't want to be there and Mr. Blank's anti-reference will help those who listen to him.
Some people just don't realise how many doors this opens.
This is even more true in a relatively niche markets with a limited number of companies. Eventually everyones ends up knowing everyone, perhaps by meeting at trade shows or just word of mouth, and reputation and networking becomes very important.
The same goodwill goes for customers as well. Our company is loved because we go out of our way to please the customer. Even the customers that are fussy, mean and ignorant. We work weekends and evening on site to get them up and they always put in a good word for us. Aside from having a good product that is the only reason we've been around for 17+ years.
That actually more or less happened to me, my former boss worked for me for a bit. Great guy by the way, so it wasn't that he made fun of me, and as a boss he was pretty good too. I hope I was just as good a boss to him as he was for me.
The reverse also happened to me, a former employee struck it big and I did some contract work for him.
It really is a much smaller world than most people think and if you burn your bridges behind you or are nasty to people it will definitely come back to you. It may take a while, but it always does.
From http://steveblank.com/about/ I find out that his last company, E.piphany, was founded in 1996. The time periods match, and the fact that http://steveblank.com/category/epiphany/ says that this story falls in category epiphany confirms it.
According to http://www.fundinguniverse.com/company-histories/Epiphany-In... the company had 2 rounds of venture capital, one in March 1997 and the other in January 1998. Then in May 1998 Roger Siboni joined E.piphany as president and CEO. So that would be the negotiation described. And the January 1998 round would be the one with the bad VC.
Looking at http://ssb.brand.edgar-online.com/EFX_dll/EDGARpro.dll?Fetch... I see that Douglas J. Mackenzie joined the board in January 1998 and was a member of Kleiner Perkins Caufield & Byers. He also had only been at the VC firm for a few years at that point, so he'd fit the description of "junior partner".
I therefore believe that the VC firm that left the bad taste was Kleiner Perkins Caufield & Byers, and the man in the dealership very likely was Douglas J. Mackenzie.
This took me less than 10 minutes to figure out.
http://www.businessinsider.com/who-was-the-vc-who-screwed-st...
Thus he can tell his story, and retain some civility...until someone comes along and is a bit too eager to show off his google-fu.
People get busy. If someone reading this starts looking at VC in a month, will they find this story again? If they do will they have time to go back and search for it? I'm betting not. And so they won't draw the connection.
Their odds of drawing the connection in a month are much, much better if they've seen the name instead.
1. "Seasoned" CEOs with ridiculous packages are a little like wearing a dark suit to work. Everyone knows it doesn't matter, but it's a way of signaling that you're willing to play the game. That doesn't matter a whit when you're trying to sell products to customers, but it matters a great deal when your game plan is to create a certain illusion that someone else can flip to a third party. This is known as "Banking on the Greater Fool Theory." It's a game, and the other players want to know you're playing along.
2. You are just the founder. The VC's model is that they take your company, put their money into it, and then they decide how to spend their money. What's in it for them to spend their money on you personally? Be sure you have an amazingly persuasive argument before asking them to take their money and give you some of it. Never think of it as your company compensating you for value you put into it. Sorry, but even though those are the words everyone uses, that's not what is actually going on.
Sorry for the gloom and doom, I'm off to have my first coffee of the day. Here's an old chuckle, I hope it makes up for my mouthful of lemons:
Economically it makes sense for an investor to minimize expenditures. If the founders are willing to work for peanuts, then it's the investors prerogative to keep them that way. No foul there.
However for any VC to ever utter the words "just the founder" in the founder's presence is a massive managerial fail. Founders are not the people who you want to "put in their place", they are the ones who make the company succeed. Even if you think you don't need them anymore, why would so blithely burn a connection with a talented entrepreneur?
We agree.
However for any VC to ever utter the words "just the founder" in the founder's presence is a massive managerial fail.
So this VC is guilty of "What You Can't Say?" I'd rather have a VC look me in the eye and tell me the deal than have a VC tell me how wonderful I am but there just isn't enough cash in the kitty to feed my family after paying for the new CEO.
If the VC ends up paying the CEO to eat Sushi while I eat Ramen, I don't care how I'm spoken to, there's a deal there I have to take or leave.
It's unwise for a VC (or anyone) to assume the person they are talking to is this objective.
Calling the founder "just a founder" is a recipe for resentment, and it's totally unnecessary. There are about a million ways to tell the founder that they can't get paid the same amount as the CEO, and this is pretty close to the most potentially damaging way I can think of.
I never said I was objective: It's really a question of which circumstance I dislike the least. :-)
It's not about money per se, it's about the signal this sends. Like the previously discussed archetypal new CFO who shows who's who and what's what by terminating free soda.
Although that brings up the question of "which game?" SarBox was the last nail in the coffin of the conventional IPO exit; with very rare "struck by lightening" exceptions that's just not in the cards anymore, and if it is it's something that will only come into play late in the game.
Nowadays a "flip" is most often (only???) a sale to another high tech company, which if they have a clue will want the people as much or more than the technology (which if they have a clue they know is nearly worthless without the people).
So, maybe this is mostly an obsolete thing for us to be worrying about. Sure, if you find yourself in a red hot company like Google or Facebook it'll come up, but it's sufficiently unlikely you probably don't have to wonder about it at all by default.
(This is a rather jarring thing for me, I started working in 1980 in the Boston area and therefor witnessed up close last two decades of the old VC/IPO game plus heard all about the go-go 70s minicomputer days. The fact that's all gone is hard to adjust to.)
Also, to get to this point the original founders may retain enough power and influence that it's less relevant.
I have an idea for a fun business model: raise a ton of cash, hire all the most talented engineers, hide them in a remote cave for 8 months while your company is in "stealth mode", and then ransom yourself off to Google for a tidy profit.
That said, having "freedom to be selective in whose advice I take to heart" is way up there on the things I like about this job. Taking money would mean having to be a wee bit less selective.
The inability to "grow a very small company" is hardly limited to small companies. E.g. look at the HP board starting a bit before they hired Carly. Or read Optical Illusions, a book on the failed spinoff of Lucent. AT&T insisted on putting a "seasoned CEO" of a diesel engine company in charge and the board was cut from much the same gray haired cloth.
They knew how to handle the "being a public company" bit of things (talent which inside AT&T wasn't jumping to Lucent) but they were totally unable to provide adult supervision here it really counted. (I could go on, and am particularly interested in this having worked for Lucent in 2001; when I started out they had 106,000 employees, when I left they were targeting 35,000....)
Bad investors expect everybody to work for free.
People also tend to have very different views on what a starvation budget is. Some people will assume a starvation budget is $10.000/yr, others will assume it's $50.000.
So we don't really have the information needed to draw any conclusion.
The whole point of a contract is to get down in writing the agreement between parties as to how things will be handled.
If you expect,as the founder, to be able to take profits a certain way at a certain time... put it in writing. It won't happen magically.
If you get money from the three Fs (friends, family, fools) as much as possible would go in to the development of the business. In this case probably your salary would be low if not non-existent.
But for larger investments soon you reach a point where it's OK for you to take out even a decent salary and start living of the invested money.
What's your opinion on where the thresholds are for different levels of salaries?
For example, watching the BBC show Dragons Den, the investors always assume the founders will not use the invested money to pay themselves. These are investments in the $100K-$1M area.
One tiny data point - my co-founder and I were personally strapped for cash when we raised seed. We paid ourselves $70K which for me was about half of my market rate at the time. After a Series A, we paid ourselves $100K, which our investors still said was 'below market'. After a Series B, I was no longer CEO, but I got paid market.
In general, don't be a martyr. You're raising money to pay salaries, and that should include yours.
Sometimes this certainly true. Maybe even most of the time. But then there's the question, can the founders learn what they need to learn about growing the company more easily than Mr. New CEO learn what's essential to its success that he doesn't understand and probably has no background, no intuitive feeling about.
The CEO in theory has the character necessary to do the big(er) company things and this is no small matter, a lot of people just don't have that (management and leadership are HARD). Whereas the character of the founders in this role is generally untested or often in the process of being tested and found wanting.
I've seen both sides, there's no hard and fast rule here.
In my case we merged with a competitor, and I believed the competitors' CEO was better at key aspects of his job (fundraising, providing motivating leadership) than I was.
Here I'm strongly suspecting we're talking an 8 to 9 figure investment, else they wouldn't be able to sustain the "seasoned CEO" in the lifestyle he's grown accustomed to.
However, the "you're just founders" attitude kicked in shortly thereafter. When we wanted to launch our MVP, they wouldn't let us, for example. They wanted to run things "their way", despite the fact that we had the majority of shares (and they threatened us when we brought this up). It turns out that these people didn't actually trust us at all, and actually looked down on us for being young adults trying to build an idea. (If you haven't guessed already, the project failed).
If they had only given us the respect we should have earned from the start from our previous hard work, we just might have succeeded doing things our way.
If you sold off 10% to investors, then it's your fault, is it not, that you did not get the financial control you required out of the deal, allowing the VC to disproportionately influence the company in your eyes?
E.g.:
They may be investing in tranches and you need future ones to launch.
If you have a bad/impossible relationship with them, future or alternative investors will steer clear.
They may be sufficiently nasty and wealthy that if you're successful, they'll sue you, or are at least making a credible threat to do so. It doesn't matter if you'd win if you don't have enough money to fight it.
The contract may have specified certain milestones, which they then prevent you from hitting.
Anyway, by and large contracts won't really protect you in a situation that gets ugly, their major purpose is to memorialize an agreement so that "but you said..." friction doesn't arise after an agreement has been made. Imagine how you might try to word a clause that starts with "In case of bad faith...", starting with the definition of that.
Besides, the founders were hiring the CEO; his job was to work FOR THEM.
Then again, if you look rationally at how companies work, all management is overhead by the nature of the job. Why should the OVERHEAD staff have the power to fire the people who actually earn the company money? The people who create the products or who bill their time to clients are obviously the people who matter the most to the company, yet those are the same people that most companies consider expendable.
That's obviously backward, and not sustainable -- but it's probably also why the state of IT hasn't actually improved over the years. The best developers are either working to go independent or leave the field entirely. In some cases, both.
That of course means that the companies that treat their staff that badly are ending up with exactly what they deserve: the leftovers. The ones that only got CS degrees because the universities lowered the bar for getting degrees.
The CEO can only be said to 'work for the founders' if the founders control the board. If the founders lose control of the board, then founder status itself means nothing.
It worked, in that he achieved both objectives and the company went public. The problem from the VC's point of view is the longer term....
This brings out one other point, which for illustration I'd like to turn around to something we're all familiar with: how much do you charge?
If you're to be successful in sales it has nothing to do with e.g. how much are your costs.
In fact, your general approach should be more one of "What is the right price and where does that leave us?"
One of many important lessons to be found in my favorite high tech company development book, Walking the High Tech High Wire (http://www.amazon.com/Walking-High-Tech-High-Wire-Entreprene... or http://www.amazon.com/Walking-Technical-Entrepreneurs-Succes...)
Though I agree with the bulk of your post and think it's great.
Truth in advertising and all that....
Do most (or even a majority of) venture capitalists have any experience as an entrepreneur? In India there are tonnes of VCs with just MBAs and no entrepreneurial experience at all. They fund mostly outsourcing companies so not much harm done. Still, makes me wonder..
Almost as an aside, he mentions "Luckily the company did go public". That's not an aside, that's the punchline.
An alternative way of summarizing the anecdote would be:
"I had an encounter with a dickish VC, but with his help I had an exit for tens of millions of dollars, so I'm not holding any grudges."
Perhaps the greater context is "Luckily we retained the essential founders and despite what the new CEO did we went public and everyone succeeded in the short term".
On an side note, is there a place where founders/developers discuss VCs and their experiences?
1) It sounds like the CEO did in fact build a company that could go public and result in a cash-out for you, putting some of the cash you felt you deserved as a founder to good use and returning it to you many-fold.
2) You were in fact lucky to be making a "founder's salary." Many founder's don't make anything.
While you may have been handled badly by a gruff VC, you also ended up with a smashing multi-million dollar exit, at least to a significant extent because of him and the CEO he brought in. I should think you would be at least a little grateful. To me it sounds like whining.
Bottom line is, you were either naive enough to hire someone you didn't need for more than you needed to, or you were knowledgeable of critical deficits in your execution capabilities and you filled those, and gave up what it took to get there. Either way, the VC may have been right.
How so? Have spent money having a great time and having not received money are different things.