Venture capital can be a double-edged sword for founders. While it brings necessary funds and resources, it also introduces new dynamics in company control. An alarming statistic reveals that nearly half of all founders are fired within 18 months after taking venture capital. This reality raises an important question: Is it the nature of venture capital that's evil, or is it about choosing the right person from the VC fund to be on your board? This blog post delves into how to select the ideal venture capitalist for your board, ensuring they are allies in your entrepreneurial endeavors, not just financial backers.
The Impact of Venture Capitalists on Your Board:
Securing venture capital often means granting the investor a seat on your board, especially if they lead your funding round. As your company grows and takes on more investment, you will encounter various personalities, from seasoned operators to those who have never managed a business. The day you find yourself outnumbered on the board is when your position as a CEO becomes most vulnerable, subject to the whims of the board's majority.
Why Founders Get Fired and the Role of VCs:
Founders may be dismissed for underperformance or misconduct, but many are fired without a concrete reason, driven primarily by venture capital board members. Often, this stems from the inexperience of VCs. The unpredictable nature of startups, with their inherent challenges and fluctuations, demands a reaction that is both strategic and calm. Crucially, your investors' ability to support you through these times is vital. However, not all investors are created equal.
Ex-Operators vs. MBAs: Valuing Experience Over Credentials in Board Selection
In the selection of board members from your venture capital partners, a critical distinction must be made between ex-operators and those who primarily boast MBA credentials. While an MBA might signal a certain level of business acumen and theoretical understanding, it doesn't necessarily equate to the hands-on experience and nuanced insights gained from actually running a startup.
Navigating the MBA Hype:
It's not uncommon for venture capitalists to highlight their MBA backgrounds as a testament to their expertise. However, as a founder, it's crucial to look beyond these credentials. Theoretical knowledge, while valuable, is vastly different from the lived experience of running a startup. The challenges faced by startups often require solutions that are not covered in traditional business curricula.
The Practical Edge of Ex-Operators:
Firsthand Startup Experience: Ex-operators bring a wealth of practical knowledge derived from direct experience in the trenches of startup operations. They have navigated the challenges and triumphs of starting and scaling a business, which equips them with a deeper understanding of what your company is going through.
Empathy and Relatability: Having been in a founder's shoes, ex-operators can empathize with the unique pressures and dilemmas you face. This empathy often translates into more supportive and realistic guidance.
Beyond Theory: While MBA-educated board members might be adept at citing case studies and theoretical models, ex-operators provide insights based on real-world applications and outcomes. They understand that the unpredictable nature of startups often requires flexible, innovative approaches that can't be found in textbooks.
Evaluating Roles: The Advantage of Partners Over Associates
When selecting board members from a venture capital firm, the distinction between partners and associates becomes critically important. A common misstep for some founders, as seen in various startups, is the inclusion of an associate on the board, particularly those with limited deal experience. This decision can lead to unforeseen challenges due to the inherent differences in the roles and pressures faced by associates compared to partners.
The Pressures on Associates:
Associates in venture capital firms often find themselves in the early stages of their careers. Lacking a substantial track record, they are typically under significant pressure to demonstrate their worth and decision-making prowess. This pressure can manifest in various ways:
Risk-Aversion: Associates might lean towards more conservative approaches, potentially stifling innovative or bold moves that a startup might need.
Eagerness to Impress: Driven by the desire to establish their reputation, associates may push for decisions that serve more to showcase their capability rather than align with the startup's best interests.
Limited Influence: Their lower position in the firm's hierarchy may restrict their ability to advocate effectively for the startup's needs within the VC firm.
The Stability and Experience of Partners:
In contrast, partners at VC firms typically come with a wealth of experience and a proven track record in deal-making and startup mentorship. This experience translates into several benefits:
Informed Decision-Making: Having navigated numerous investment scenarios, partners can provide nuanced and well-informed advice, understanding the unique challenges of startup growth.
Less Performance Pressure: As established figures in their firms, partners face less pressure to prove themselves, allowing for a more balanced and long-term view in decision-making.
Greater Influence: Partners usually hold significant sway within their firms, enabling them to mobilize resources or support for the startup more effectively
Conclusion:
Choosing the right venture capitalist for your board is more than a financial decision; it's about ensuring that your company's leadership and vision are supported and enhanced. The ideal VC board member should bring experience, stability, and a genuine understanding of the startup journey. Remember the adage, "You can't learn to surf by reading about it." The same applies to navigating the turbulent waters of startups. You need someone who has weathered the storms of a startup's lifecycle — a former operator who is now a partner at a VC firm is likely your best bet.
JOIN OUR COMMUNITY to further explore how to navigate the complexities of investor relations and company governance. Follow us on TIKTOK for more updates and SUBSCRIBE to access our FREE RESOURCES that are designed to aid founders in making informed decisions. If you have any questions about investors, fundraising, or any other aspect of founding a company, leave a comment below. We are here to support and guide you.
