Thoughts on Venture Capital

Posted: August 3, 2011 in Management, venture capital
Tags: , ,

At one time I sat on an advisory panel that reviewed requests for venture capital. This was related to Georgia’s Yamacraw initiative. The panel was advisory only but included local Atlanta businessmen. It was a small panel and we had some great discussions. The state would only invest if other venture capital funds were already investing. Consequently the proposals had already survived initial vetting. Still, I was surprised at what I saw. I was discussing this with a friend and thought I would post a few of my observations.

Observation 1: Commitment or lack thereof.

Time and again I saw companies based on work down at Georgia Institute of Technology (GT). GT is a great school and there is great research going on there. The problem was that the professor was proudly listed as a founder and key player but when I asked if he had given up his tenured position to focus on the company the answer was always a resounding “No!” Let me get this straight. You want people to put millions into your company but you aren’t willing to work full time to make it a success. I’ll pass. I am sure there are lots of examples of successful companies done this way. I just don’t like the odds. I want to distinguish this from the case where a graduate student has invented a technology while working with a professor and the student is forming the company with the professor as a consultant. As long as the founder is full time, I’m good.

Observation 2: Serial entrepreneur who doesn’t take responsibility.

There was one guy who had started an earlier company. We heard how the failure of the earlier company was the CFO’s fault. This guy had been the CEO. It happened on his watch. At the minimum I expected to hear about painful lessons learned and future corrective actions. Instead it was all excuse making. I passed.

Observation 3: Big ego and insistence on retaining control.

This one isn’t from the Yamacraw Advisory Board. Rather it is a painful lesson from a personal investment. I thought I had done my homework. The technology was sound. The market seemed ready. There was diverse funding. However, when more funding was needed, the founder refused to give up control of the company. I learned the hard way that this is a big red flag as is a person putting his name on the company. The CEO would have been an excellent, and probably very wealthy, VP of Engineering. Instead he became a failed CEO. Unlike me, the smart money refused to invest unless the venture capital crowd gained control. Hey, it’s their money and they wanted a meaningful say in what went on. They were correct in wanting that. I was too naive to see the danger signs. If a CEO is afraid of having to convince a board of directors then he shouldn’t be CEO.

Observation 4: Willingness to work hard and generate a hard work culture.

Building a successful company is hard work. Just ask people who have done it. Many will tell you that they are glad they hadn’t known how hard it would be because they might never have done it. When looking at a potential investment I want to know that the entire team understands that they are in a race against time and money. That means hard work; lots of hard work. It means being careful with spending. Generating a hard work culture doesn’t mean generating an oppressive one. People should be excited that they are building a company. Their ownership in the company should generate adequate motivation. The work environment should be alive with energy. People should be working hard because they want to win. This can be difficult to judge but it can come through talking to the executive staff.

This is by no means a complete list. I have avoided the standard topics of market analysis and threat analysis. Most books on the subject cover that better than I can in a blog entry.

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