Staying CEO After Taking Venture Capital

At some point in the life of your company you will probably consider taking venture capital to grow your business. Horror stories abound regarding company founders being tossed out by their institutional investors. Hidden in those departures are the real lessons that every entrepreneur needs to know…how do you accept venture capital and continue to play a meaningful role in your company, either as CEO or as a senior executive who continues to exert significant influence over the development of your company?

By Roger P. Widing, Managing Director, SpaceVest

American Venture Magazine

The truth is that most venture capitalists will not invest in a company unless they have a high level of confidence in the CEO. In most cases, VCs will tell you before they invest if they believe there is a leadership issue and will usually insist on bringing in a new CEO simultaneous with or shortly following their investment. Even if you survive the initial investment, however, the VCs will carefully monitor your performance as CEO because their experience informs them that few CEOs possess the skills to lead a company from its infancy to adulthood. Therefore, you need to know what qualities VCs look for in determining the success of a CEO.

The Head Coach
As you already know from running your own company, a CEO wears many hats and bears ultimate responsibility for the company’s success or failure. In a venture-backed company, those responsibilities don’t change, but the addition of outside investors adds a new layer of management oversight that you have to learn to manage just like any other part of your team. As the Head Coach, VCs want to know that you can go beyond managing people. You need to build a real team. Can you motivate all of the constituent groups crucial to business success– employees, investors, customers — with your vision? Do you work to instill high morale and create a corporate culture of success? And is your team all focused on the same corporate goals and understand how you plan to deliver a winning season?

Paul Graziani, CEO of Analytical Graphics, Inc. (AGI), started his company 13 years ago and took institutional venture financing in 1995. Paul believes that one of the keys to his success as CEO is giving his team the information they need to reach their goals and motivating them via access to that important information. By creating an environment conducive for constant communication for his 125 employees, Paul achieves this is in a catered lunch every Friday. During the hour-long lunch, Paul leads a discussion called “Storytime” in which he details important milestones achieved that week. “We lead off Storytime with anything important that has happened…big deals we just closed, important customer purchases, stories from trade shows. After that, each department head stands up and talks about what is going on in their division”.

In order to keep the entire team focused on the corporate goals, Paul believes it is important that all employees do their part in contributing to the success of the organization. Paul adds, “The entire company is based on bonus. Most non-sales people have about 15% of their compensation based on how we do from the top-line. Every quarter we announce what our corporate top line performance is. It is management’s responsibility to make the bottom line happen, but it is the rest of the company that needs to make the top-line happen and that is what we drive them on.”

The Great Communicator
You’ve heard it a million times…there are dozens of books about the subject. Effective communication is the nucleus of any great organization. But, what does that mean to the founder of a venture-backed company? Great investor communications start with understanding their expectations – what are their goals for your company? What kind of exit are they looking for? What is their time and on-going financial commitment to your company? What do they expect from you as a leader?

Different investors often have different expectations for their investment. Take the time to listen to each individual and pay attention to what they are telling you. Your goal should be to manage the investor relationship through frequent two-way communication.

By and large, investors don’t like surprises. Paul Graziani of AGI concurs, “One philosophy that I use is that I don’t want people to be hit with an issue at a Board Meeting, brand-new, without ever having heard of it before. I will try before the board meeting to get on the phone to discuss any major issues and make sure they have some time to think about the issues before they get into the Board Meeting.”

The ability to deliver timely information, to disclose bad news as well as good news is paramount to earning the trust of the investors. VCs understand that bad things happen even to the best-managed companies, but there is nothing they can do to help if you withhold the information. You will erode their trust in you if they think you are withholding information from them.

A Change Agent
Change. It’s amazing how one little word can wreak havoc within an organization. Usually associated with a negative event, rumors about a “change” can bring any organization to a standstill. Your company will never change more than when you take outside investment. Your ability to identify and implement the myriad of mid-course corrections your company will need to make is what will set you apart as an effective leader in the eyes of your investors. Can you recognize the signs that require change in your organization? Can you become a change agent? Do you embrace change internally and externally and make it an integral part of corporate culture as a way to continuously move your company forward? And most importantly — are you nimble in adapting your company, product and management for change?

When Rich Mavrogeanes of VBrick Systems stepped down as CEO, he maintained a high-profile executive position in the company as President, CTO and Chairman of the Board. However, as the founder of the company he knew that his team was looking to him on how to embrace this change and it was important to lead by example so that the team could accept the new leader. Rich felt so strongly that the team should build loyalty to the new CEO that he did not attend staff meetings for the first six months, so that it would be clear to the team who was in charge. Overall, Rich’s acknowledgement of the new CEO’s leadership and their subsequent close working relationship has allowed others to accept the change as well. “We are very aligned, communicate often and try to speak with one voice”, says Rich.

The Maestro
Much like the Maestro conducting a symphony orchestra, a good CEO will orchestrate harmony among all of its different players. All the players should integrate and work together. What results is a well-managed cohesive organization, as opposed to a cacophony of noise.

The basic principles of management come into play here. If you take the time to put the right people in the correct roles with the responsibility necessary to succeed, you can rely on them to execute to your plan. Delegating will not only free up your time, but also will show your investors that you possess a crucial ability to manage successfully through the many stages of your company’s growth. This is one of the most important things an investor will be looking for — can you manage multiple stages of the company’s growth…can you grow the company from a string quartet to a full orchestra and still produce beautiful music?

Often the skills an early-stage entrepreneur brings to the table are perfect for the start-up stage. But, as your corporate management structure becomes less horizontal and more vertical, so should your management approach. The CEO needs to release control of details, give the team the authority to succeed, and trust the members of the management team to execute to the plan put in place by relying on the organization to function as a whole unit.

Paul Graziani of AGI is a strong believer in taking the time to put the right people, including himself, in the right places in order to manage effectively. Although Paul has been the CEO of AGI since founding the company 13 years ago, about a year ago he realized that there was a more effective way for him to get his job done as the company continued to grow. Not being a process-driven person and having multiple direct reports, Paul needed to dedicate more time to his “outside” role of developing business relationships critical to AGI’s success. He created a COO position and moved an existing executive within the company who had the skills to run day-to-day operations at AGI. This action has enabled the organization to function more smoothly while allowing Paul to focus on what he does best — establishing the long-term vision for the company and working on strategic initiatives with business partners and customers.

A Continual Learning Process
So, how do you hone your leadership skills to stay the CEO as your company grows? Paul Graziani of AGI believes that you need to view your role as a continual learning process.

Although Paul Graziani has been CEO of AGI since its founding, he says, “I have always had the philosophy and expressed it, that right now I am Chairman, CEO and President, but at any time if we find someone that is better in any or all of those roles, Alleluia. I’m a major shareholder here, and if someone can do this better than me, fantastic. I’ll always find some position in the company and I will always want to be a part of the company, but at any time if we found some fantastic candidate and I agreed that they are better, I would be happy to have them come in. The whole company would be better off, all the shareholders would be better off, and my ownership in this company would be just that much more valuable.”

Part of every CEOs learning process should be about being honest with yourself. Take the time to reflect not only on your strengths and weaknesses as a manager, but also on your company’s current leadership needs. In this way you can more accurately assess what your company requires from its CEO at a given point in time and whether you are the best person for the job.

“If you have fear of losing control, don’t take venture capital funding. But that presupposes that losing control is bad, and losing control isn’t necessarily bad,” says Rich Mavrogeanes of VBrick Systems. Rich is an example of a founder that realized bringing in a new CEO would give the company the ability to grow. “From day one, I didn’t have an expectation of being CEO forever. I made it clear to the investors that at some point I expected to hire a CEO and part of that was because I didn’t feel that I was the right CEO for an IPO. Part of the reason for the timing of bringing in the new CEO when we did was that we needed to raise another round and we had a much stronger proposition of raising additional money if we bolstered the status of the management team”.

Regardless of the funding options you choose and who is part of your team, the leadership criteria VCs use to evaluate a good CEO are an important part of successfully growing your company. As the Head Coach your focus is on building a great team; as the Great Communicator your goal is to get your team to read from the same play book; as the Change Agent you move your team toward its goals while adapting to a dynamic external environment, and as the Maestro you benefit from all of the players being in the right role and knowing their goal.

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