Following a brief digression to write about big data, I return today to the final piece on the lessons I’ve learned as a VC over the past 10 years. After talking about training and making investments, today I will talk about managing investments.
1. You’re the coach, not the quarterback. No matter how hands-on investor you are or want to be, you need to understand that, on a day to day basis, your CEO and his/her management team is running the company. You must trust them to work through the operational issues that arise. As a coach you can:
a. Let your management team know that you are always there to help them (around business models, sales models, sales compensation issues, hiring decisions, etc). I’ve come to learn that investors with operational expertise are highly valued by entrepreneurs, particularly now that the times are tough.
b. Constantly evaluate your management teams from top to bottom. You need to learn to trust your management teams and when you stop trusting them, it’s time for a change. If a team is starting to struggle and execute inconsistently, make the appropriate changes quickly. Strong execution rarely returns to an inconsistent team. For this reason have learned not to wait until the board meeting to find news about the company’s progress, but I frequently talk with each portfolio company’s CEO. A quick call every couple of weeks, particularly for early stage companies, does wonders. It is important to establish a healthy dialog with the entire management team starting with the CEO. They must all feel comfortable telling you good and bad news, and seeking your input.
c. Know when to accelerate and when to put on the brakes. Understanding how your management team is performing will also allow you to determine whether to make changes to the company’s burn rate, some times going against your CEO’s opinion. Such decisions obviously impact hiring, market expansion plans, product development, etc. They also play a pivotal role when considering future financing rounds.
Actually, if you try to analyze this point a little more extensively you will come to realize that as an investor board member, and unless you are the only investor in a company, you are not the only coach. Each investor with a board seat is also a coach. Oftentimes the coaches’ interests don’t align, even if at the time of the investment everything appeared perfect. For example, you may want to let an executive go, slow the burn, sell the company, invest less money in the company, etc. while your co-investors want to make different decisions. CEOs may try to capitalize on such differences of opinion and attempt to create a split between you and the other co-investors and/or independent board members. For this reason …
2. Make sure you’re always on the same page with your other board members, particularly your co-investors. I have made the same point during the second post in this series when discussing lessons around the process of initially investing in a company. But while it is important to be on the same page with your prospective co-investors while you are considering an investment opportunity, it is doubly important that you agree throughout the investment’s lifecycle on issues such as management team performance, burn rate, milestone achievement, valuation expectations (for future financing rounds and potential exit), exit scenarios, etc. Make sure you have a good understanding of each such issue before even trying to discuss it with your co-investors and fellow board members. Steve Blank recently wrote about the current exit environment for technology companies and its ramifications to VCs. Being on the same page always increases the probability of success even when the company faces challenges.
3. It’s about the money you return, not the money you invest. In the last post of this series I wrote how you should treat your LPs money like your own. Your LPs expect you to provide them with superior returns. Realize that it is not about how many investments you have made, the amount of money you have put to work and how many boards you seat on. It is about ROI and IRR. For this reason, you need to be thinking about the lifecycle of each portfolio company and the overall investment it will require, rather than just the round you invested in. In the process you must be able to evaluate and determine whether you have reserved enough money to protect your ownership after subsequent rounds, some of which may be down rounds, and others may need to be inside rounds. You also have to be prepared to stop investing in a company or even walk away from underperforming investments once you feel you realize that your actions no longer result in the desired outcome. While such actions may not endear you to an entrepreneur or a management team, remember this is not a popularity contest but an ROI contest. Even if there are hard feelings initially, at the end management teams always understand the rationale of such actions.
4. Keep your partners informed of the state of each of your portfolio companies. I cannot stress the importance of over-communicating with your partners. It’s also always OK to ask them for help and to collaborate with them around a particular investment, if you believe that this increases your probability of success, i.e., providing superior returns. Ultimately it is about the investment’s success, not about whether you’ve achieved it on your own.
5. Failure is always one of the possible outcomes. You need to understand that regardless of how careful, analytical and diligent you have been during the pre-investment process, how hard you have worked as a board member, how strong of a management team you have, and how good your co-investors are, companies, particularly early stage ones, fail more often than they succeed. Dealing with failure and trying to maximize returns even during the failure is part of being a VC. If failure appears inevitable, then work with the company’s management team and your co-investors to consider all the options and create a win/win experience for everyone. For example, rather than closing a failing company down there may be an opportunity to merge it with one in the same space that is performing better, even if you become a minority owner in the resulting entity. Learn from such experiences, repeat the positive and try to avoid repeating the negative.
And finally, regardless of your successes, remain humble since prior successes don’t guarantee future outcomes.