The VC as Pygmalion – or the limits to personal value-add
It is a well known fact that perceived value add is very different according to whether you are the CEO of a startup, the VC who funded it, the angel who put the first $ in, or the employee who did that large biz dev deal.
VCs always feel that they played a defining role in the successes that they were part of building. The language reflects this: "I funded company X and I recruited its CEO"; "I had to get this management team back on the straight and narrow"; I "repositioned the business". It is also driven by an industry that is always worried about attribution: who was the "go-to investor" on the board ?; who had the vision to push this company to reinvent this market rather than conquer it ?; when everyone around the board table was focused on this year’s revenue, who had the guts to take the 5-year, game-changing view ? You get the picture.
Of course most great feats in life are achieved by men who are unaware of their own limitations. Think Leonidas and his 300 at Thermopylae. Most entrepreneurs succeed because of the real life equivalent of theatrical "suspension of disbelief". Likewise most VCs do what they do because of an enhanced perception of their own ability to influence the outcome and hence a probably misguided view of the real risk-return tradeoffs they decide to take on.
Pic: Leonidas is coming for his B round of funding; he looks determined
So far so good. As Leonidas has demonstrated, determined humans acting as a team and with a sole intent and purpose can achieve great things. Hence ignorance coupled with skill, passion and flair is in fact a great combination to create extraordinary outcomes (both good and bad of course). Arguably it would be even better if venture capitalists recognised when suspension of disbelief comes into play and harnessed it to make even better investment decisions, but hey, next thing you know we will be discussing the latest advances in neuroscience and debating the existence of free will. Some other time, I don’t want my reader count to go down to 3 :-)
The problem arises when a venture capitalist (or group thereof) starts to believe that he can "shape" the companies that he invests in way more than he really can. "Great opportunity, with my help this team will be fine in getting it off the ground and then I will go and hire the right folks". It’s subtly different, but now the investor is starting to confuse his role slightly: from investor acting through the board to steer a management team to uber-executive investor masterminding the best way to engineer a success. I call this the VC as Pygmalion, because the artist-financier has now fallen in love with his own (now inanimate) creation and believes he can create a mechanical contraption to bring to life (such as feed it a new strategy and bring in outside management to execute on it). The startup as the VC’s automata.
Pic: Since we are on a Greek theme today, did you know that the Greeks invented everything, including the first mechanical computer (100BC) ?
Here are what I believe to be facts about our business that one should not ignore:
- nothing can replace founder passion
- hired management will always be looking at the current monetary value of the opportunity they are pursuing versus other market offerings; you can scare them with reputational issues, but it just is not the same
- when the going gets tough, founders are usually the ones who will pull miracles out of thin air, who will galvanise a team to do the impossible, who will land the big customer when everyone stopped believing.
- most great successes in venture and probably in the business world were started, scaled and exited by founders who grew with their organisations. think Amazon, Dell, Qualcomm etc.
- when do you get in outside management, treat them as founders and make sure they get along more than well with your founders.
This is certainly generally true for Atlas Venture: Business Objects, iLog, Spotfire to name some examples from entreprise software over the years … which all happened to be funded by a person called Philippe Claude, a gentleman who appeared to have an outstanding nose for human talent.
This does not mean that founders who cannot scale or whose egos run out of control should be protected at all costs. What it does mean, in my book, is that you should not compromise on the quality, ethics, engagement and maturity of an original founder when making an investment decision. I am sure there are many counter-examples, but I would also bet that these are not statistically significant. Just the same way as some fund manager who takes uncontrolled risks always ends up as the top performer that particular year, so VCs who take gambles on backing weak founders will make money sometimes. I have not looked at any numbers, but I would be willing to bet that VCs who sustainably make decent returns back outstanding founders and know to let them run their business or help them run their business.
As VCs we feel very passionately about our companies (just see my last post on Seatwave, and that’s not even one of mine :-)). At least most of us do. At least most of us do until they fail or some unwritten "moral contract" gets breached by the ungrateful, failing CEO. Our perception of our own value creation is often out of synch with our real contribution to the business. This is for a simple reason: making a startup a success is really hard work. It takes a lot of talent. The reality of value creation is that
- It is shared amongst a large group of people that includes founders, outside management, employees, investors, non-executives, customers who believe, PR agencies who get it and so on
- It rains down on all of us when it happens.
Success is a great thing, and it does not happen often. When it does, be sure to share it.