In my 20-years working with startup companies, I have become attuned explicitly to how founders in the run-up to the first round of funding position themselves vis-à-vis the business. A similar situation I encountered when asked by an investor friend to try and rescue a promising startup from the managerial claws of its clingy founder.
Now, one should only invest in an early-stage company when the macro-economic upside of the company makes sense (and thus the company can weather many technology storms), and when the founder is up to the task of taking the company along a considerable chunk of the trajectory towards such projected upside of the company.
The first part of the assessment is relatively binary; as an investor you align with the vision of the company, or you don’t. The second part requires more nuance, for a founder with great intentions is not always a founder with skilled execution.
The majority of today’s investors in technology startups invest using a private equity risk model (subprime venture capital hinging on hindsight) utilizing a traction driven model favoring the protection of downside, rather than a focused pursuit of upside (as of yet unproven foresight). So, to be a great founder – in the eyes of most venture capital investors – is to protect investor downside along with the milestones they set out, carefully tracing the line of the J-curve they learned about in business school.
Such spoon-feeding of money and risk through multiple rounds demands a lot from founders, typically technologists with little experience in sales, marketing, support, and finance – the ecosystem of a company defining how the “rubber meets the road.” Let alone the lack of knowledge about modern economics under which technology systems need to operate to provide renewable socioeconomic value for years to come.
And now, along every step of the way, subprime investors demand a consequential change of the business parameters, to curb their appetite for optimal downside protection, sending founders into a tailspin.
No wonder so many founders and their companies fail. They married the wrong investors.
Discourse at scale
Not helped by the lack of savvy experience guiding technologists, and in blissful ignorance of egalitarian economics, their business concoctions quickly result in an unmanageable discourse between the trajectory of downside and upside. And soon after funding, when reality comes calling, the faith in the founder begins to tarnish.
Nervous investors, with self-induced risk formed by a plethora of other equally unstable investments in their subprime portfolio, quickly kick founders to the curb who miss one-too-many quarters of new revenues. Only to displace them with “experts” from the corporate world who have never crossed any chasm, but throughout their long-standing careers have managed to impress their imperial managers and fill their pockets. They buy-themselves-in with a little equity and avoid the rigorous scrutiny needed to challenge the downside.
The plot of trickle-funding thickens, by which the feasibility of upside is put in severe jeopardy.
Upside trajectories are by definition of their outlier status non-uniform. And thus cannot be traced by a uniform model of downside protection. The reason why venture capital – in its current incarnation of populist risk – is fundamentally incompatible with the needs of groundbreaking innovation.
Founders sell their dreams cheap, by partnering with anybody offering them a spoonful of money, to build some more consequential technology and traction with the use-of-proceeds. Worry about the next round of funding later, when you need to cross the dilapidated bridge of running-out-of-money, is what they are told. The founder’s decision to sell upside cheap while obeying to Silicon Valley’s “best-practice” of capital efficiency bites him in the ass at every board meeting preceding that next phase.
Spoon-feeding of risk and money leads to investor-run companies – and thus generally to failure. Such is the outcome of the venture capital model we popularized. A model in which “investors” attempt to mitigate risk by excessive fragmentation and merely trade downside risk and money to yield portfolio returns, to raise yet another cushy fund. Quite another objective of being 100% vested in making one founder’s dream of renewable socioeconomic value become a reality.
Sell your dreams cheap as an entrepreneur, and you too will be confronted by a variant of the above, I guarantee it.
Survival of the un-fittest
The founder is kept on the board, under the voting rights attached to his founding equity position. And of course, to prevent this “spiritual leader” from becoming demoralized and leaving the company altogether and taking others with him. The new corporate CEO comes on board and dilutes founders’ shares with his presence and a new round of funding. Honed by the best-practices of large corporations, the new CEO collaborates with the founder on the next steps of consequential change along the stepping-stones of downside protection.
Incapable of re-envisioning the company anew (not his core competency), and hamstrung by the prolonging of the downside mentioned above, combined with the passive-aggressive assistance of the founder reluctant to admit his wrongdoing (founder threat #2), the new CEO embarks on a trajectory not far from its original. And of course, it also fails. Albeit, this time with even more investor control bestowed upon the company.
The corporate CEO is let go in yet another stunning contempt of downside protection.
Now – drumroll please – with the approval of the original investors of the company, say hello to founder threat #3 as the founder re-emerges as the new CEO of the company. Ready to cause it all to fail one more time.
You can’t make this up
I have seen many incarnations of the above happen all-too-many times in Silicon Valley, including very recently, with some of the most prominent venture capital investors in tow. It is this dance I want nothing do with, for the entrepreneurs who sell their upside cheap are far from entrepreneurs, and the investors who subprime risk are low-life bean traders.
Neither will produce or promote innovation with a lasting socio-economic value the world cares about. So tell me, why are we still using our hard-earned public money (through asset managers investing in venture capital firms) to prime this pump?