Entrepreneur : a ‘marked man’ when using VCs
Congratulations! Your start up technology company, the one you've painstakingly grown through countless long nights and weekends of work and funded with two mortgages on your home, has finally hit pay dirt.
Customers are lining up for your hot new product. Sales are taking off generating much needed cash to fuel your fast growing R&D team.
Even so, your investors -venture capital firms that arranged an earlier round of financing only months ago - now say you need to raise another $5 million to fuel growth.
You agree, even though another private placement dilutes your ownership stake in the business to below 50 percent.
At first this doesn't bother you. You're still the boss, you're still in charge.
Increasingly, however, you notice that your board of directors is questioning your actions.
If this sounds familiar - and it will to many entrepreneurs - you know you've probably already lost control of your company.
From here, your removal from the position of CEO bumped up to chairman, bumped down to chief technical officer, or bumped out of the company - is just a formality.
"Whether you want it or not, the venture capitalists are going to take you out. It's just the nature of the beast," said Shawn Ling, the newly installed president and chief executive of Quarterstone Communications Inc, an Ottawa systems integration company. Ironically, Ling replaces QCI's founder, Cholo Manso.
"The problem with venture capitalists is they're usually in for a quick play. They're in for 12- 14 months and, in most cases, they're looking for technology in the infancy stage where they can control it. So they get in, control the board, and sell off under a merger/acquisition or IPO (initial public offering) play," Ling says.
"You either make a decision to put up with it or you make a decision to leave. That's the way it typically works at the executive level."
Ling speaks from experience. In 1997, he left the company he co-founded, Linmor Technologies Inc., less then two years into his five year employment contract and less than a year after receiving $4.5 million in financing from a consortia of investors.
Venture capitalists agree that, for the most part a technology company founder's lifespan in the top job is short.
"In most cases, the founder isn't going to make it," said Andy Katz, president and co-founder of Skypoint Capital Corp. "At some point, usually after one-and-a-half to two years (after the company is founded), the expectation would be that the founder changes roles." In most cases, Katz said, that means moving down to the job of chief technology officer.
For entrepreneurs who have no intention of relinquishing control, however, it is important to realize that "founder redeployment'" is more apt to occur in companies whose boards are controlled by venture capitalists' representatives and individuals recruited by these capitalists to provide expertise in areas such as finance or marketing.
"When you make a decision as an entrepreneur to have a board-run company, you are crossing the Rubicon at the point," said Tom Valis, a general partner at Celtic House.
A chief executive can get a failing grade because of problems such as falling revenues or delayed product development cycles.
But doing a good job as CEO can also haste a founder's departure from the top job. It's often when a company begins to grow very quickly "that you realize you have to scale your organization and bring in new competencies, " Valis said.
Founders able to adapt to the changing needs of their companies, and who possess the savvy and training to survive boardroom clashes, are few and far between however.
"You can't make someone into a CEO, "said Valis. "Really, the founders have to be willing to play another role in the company.
In the end, Ling said, "it all comes down to numbers. It's always rosy when the revenues are in, but when they're not, everyone starts looking for scapegoats. The buck stops at the CEO.
Does this sound familiar to you, or are you have you even got this far. It seems that even if we win we loose. I have met several inventors who have gotten their ideas this far only to loose out to venture capitalists.
Now is the time to start developing our own ideas so we can get our rightful portion of the profits. We have the ability within ourselves as a group not only to develop our inventions but protect them as well
With the onset of Internet we can develop an organization of inventors and entrepreneurs willing and capable of taking a project from the idea stage right through to the market. If we don't develop our ideas then who will?