Early on in my venture capital career I visited the National Venture Capital Association Conference in New York, and was fortunate enough to meet David Morgenthaler, the founder of Morgenthaler Ventures – who recently closed his ninth venture fund at $US400 million.
We discussed various topics including the ideal professional background for a venture capitalist/early stage investor.
David made it very clear that he would not hire anyone as an investment manager that hadn’t either built one or more businesses as an entrepreneur or had operated as an executive at a “chief” officer level within a rapidly growing company.
Only with this experience, he explained, can the venture capitalist truly understand and empathise with his portfolio CEOs. Importantly, such experience provided an ideal foundation for assisting CEOs through the inevitable set-backs and challenges that every high growth company experiences.
At the end of our discussion he left me with one very simple piece of advice. “Don’t invest in a company because you think you can run the business; invest in it because you are convinced the founder/CEO can run it.”
This is a real challenge, particularly for experienced CEOs or entrepreneurs who are new to investing. When one is so used to calling the shots, it can be very difficult to step back and allow others to take the wheel. One way or another, investors have to learn the difference between being an executive and non-executive director.
Another reason an investor/director may choose to start micro-managing is to undermine the CEO. This is a political manoeuvre to reduce the confidence of the board in the CEO, as they see a co-director feeling it necessary to take on executive management responsibilities.
My recommendation is to actively address the issue. If you are convinced that your investor is effectively a frustrated CEO, then organise a dinner and raise the issue – not as a complaint, but as a realisation that it can be very difficult to know where to draw the line. Suggest mechanisms whereby the investors’ input may be channelled so that it doesn’t undermine your management.
If your investor has ulterior motives, then you will need to engage political strategies to sure up support from other investors/directors before confronting the behaviour.
In any event, be comforted that this is a common problem, particularly with inexperienced investors, and that its resolution is typically driven by establishing more formalised board reporting practices, which satiate the desire to interfere by providing more appropriate mechanisms for non-executive directors to make their contributions.
Good luck!
Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology based businesses.
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