Last week I met the CEO of a recently funded tech firm (yes, it still happens) who described at length his plans to build his business. As he spoke of his young executive team, its successes to date, and his plans to lever the new funding round to conquer the world, he exuded the sense of invincibility that comes with youth and the validation of funding. Afterwards, as I reflected on our meeting, part of me hoped that underneath the bravado was an individual who was as least a little frightened, for if he bothered to peruse his new venture partners’ playbook, he would know that he is anything but invincible.
Venture firms assess technologies, markets, and management teams for the likelihood that they can come together to generate returns on their investments. Home runs are the hit of choice and these require, at minimum, aggressive swings. While strikeouts are expected, make no mistake that firms receiving venture funding will swing, and they will swing hard. Venture firms are also mindful of the timelines in which they must generate returns to their own investors and thus the clock is always ticking, always compressing the business cycle for everyone involved.
Racing against time, venture firms have limited patience to indulge their investee companies in countless cycles of trial and error learning. While they value the innovation and energy of founders, they much prefer the sure hands of proven executives who can take their ideas to the marketplace, scale the enterprise and stickhandle it to a profitable exit. Serial CEOs are especially in demand for they bring not only the wisdom of experience but also a network of proven executives who can be called upon for specific tasks as the business grows. Since both the marketplace and pool of proven talent is far larger in the US, not to mention the venture capitalists who matter most, the gravitational pull for Canadian firms and their CEOs is always from the south.
These realities have several implications for the founding CEO and his or her team. First, it means that the length of rope with which to make mistakes is cut short on the same day that the investor cuts the cheque. It also means that the math is simple for the founding team: you either learn as fast as your company grows or you will die. In other words, the founding team members must be cognizant of what they know now, what they need to know as their business grows and they must be committed to somehow bridging the gap. Venture capitalists are not insensitive to the problem and may inject operational wisdom at the board level or even encourage company leadership to find mentors. But they will make it clear that this is not elementary school. At the end of the day it is the executive team’s responsibility to assess themselves as the context changes, and adjust (dare I say grow) as their business changes. It is their responsibility to figure out what they have to learn, and either learn it, hire it or get out. Few CEOs and founding team members understand this responsibility and even fewer are up to task, especially in the limited time given to them.
Venture funding can be a powerful accelerant for a company seeking to grow. But as with many catalysts it is also extremely flammable and must be handled with care. Early stage CEOs who are too cavalier and ignore the warning label are sure to get burned.
Robert Hebert is Managing Partner of Toronto-based executive search firm StoneWood Group (www.stonewoodgroup.com). He can be reached [email protected] or call (1) 416-365-9494 EXT 777