The Human Piece Of The Venture Equation

We’ve been attending a lot of “demo days” in the past month and I am attending one more this week, TechStars in Boulder tomorrow. These startup accelerator programs, inspired by the success of Y Combinator, are launching something like 100 new web startups a year, possibly more. And the founding teams of all of these startups are young and inexperienced, mostly by design.

That youth and inexperience is an asset to many of these startups. We’ve been through why that is before. The founders have low personal burn rates so $25,000 can take them six months. They are largely developers/hackers who know how to build stuff quickly and inexpensively. They create lean, mean, capital efficient companies. They grew up with the web so they have a “native” feel for how web apps and services should work. And of course, they don’t know why they are going to fail so they “just do it”.

It would be interesting to take all of the companies that have come out of these startup accelerator programs over the past four years and track them.  Of course some have failed and some have been bought. But that’s not really the data I’d be most interested in. How many have built a real business with real revenues? How many are profitable? How many have raised a significant amount of venture capital? And how many have hired experienced managers to run their companies? And how is that working out?

I am most interested in the human piece of this analysis. When do the advantages of youth and inexperience give way to the advantages of maturity and experience? And what are the tell tale signs that the young founders are maxing out on what they can give the company? And what does it take to get them to willingly hand over the keys to the car to someone else? Does it happen without VC investors forcing the issue?

We have one Y Combinator company in our portfolio, Disqus, and no other companies that come out of these startup accelerators. But we have young founders running a bunch of our companies:

Tumblr’s founder/CEO David Karp is 21. 

Disqus’ founder/CEO Daniel Ha is 22.

Etsy’s founder/CEO Rob Kalin is 28 and he recently turned over the reigns of the company to new CEO Maria Thomas.

Greg Yardley, the founder/CEO of Pinch Media is 29. 

Jack Dorsey, Twitter’s CEO and the initial creator of the service, is 31.

Return Path’s CEO, Matt Blumberg, is 37, but he’s been running the company since 1999, when he was 28 years old.

As I told Matt when I first joined his board, “the failure rate of first time CEOs is incredibly high”. You just don’t know what you don’t know. And it leads to making rookie mistakes. Early on in a company, those mistakes don’t cost much. And some mistakes can even be turned into wins.

But as a company grows, the rookie mistakes become harder to manage around. The value that everyone has invested in the business, most importantly the work of the team, starts to weigh on everyone’s minds. The CEO’s job goes from managing the product, writing a little code, doing customer support, and raising money to managing people and teams, processes and priorities. It’s not a job that most people enjoy doing and it’s a job where experience really does matter.

Some young founders can make the transition. Matt Blumberg did. But he worked really hard at it and his personality is well suited to the CEO job. Rob Kalin chose not to make the transition and spent a year recruiting a CEO he was confident could keep what was important about Etsy and change what needed to work differently.

I’ve watched my friend Mark Pincus struggle with this issue over the course of his career. I first backed Mark in 1995 when he was 28 or 29. He quickly flipped that first company, Freeloader. He handed over the reigns of his second company, Support Software, when it went public. He handed over the reigns of his third company, Tribe, and it was a bad move. The hired CEO didn’t know what he was doing with Tribe. So this time around Mark, who is now 42, is running Zynga with a firm grasp on the wheel.

I’ve learned a lot from watching young entrepreneurs like Mark and Matt grow up in the CEO role. I’ve learned that nothing can replace the entrepreneur’s passion and vision for the product and the company. If you rip that out of the company too early, you’ll lose your investment. I think it’s best to wait until the initial product has succeeded in obtaining a critical mass of users and a business model has been developed that works and make sense for the business and is scaling. Then, if its warranted, you can sit down and have the conversation about bringing in experienced management.

Some entrepreneurs react very negatively to that discussion. They have their own ego and self worth tied up in the company and cannot imagine the company operating successfully without them in the driver’s seat. They also don’t know what else they’d do if they didn’t run the company. It’s a really hard transition and can cause great pain for everyone, including the company.

I always try to focus people on what is in the best interests of the company, not specific individuals. That, of course, is easy for me to say because nobody is talking about me leaving the company. I don’t work there. But even so, it’s the right point of view for everyone to take. Sometimes the founders get it right away and are happy to part ways and do something new. Sometimes the founders understand it intellectually but have a hard time emotionally. In that scenario, I think time and patience can yield the right outcome most of the time. But sometimes, it’s never going to happen without a fight. And of course, sometimes the founders shouldn’t leave at all.

How do you know if a founder can scale into the long term “permanent” CEO of the company? Well I don’t think you can know that when you make your initial investment unless the founder has done it before. We have plenty of those situations (successful serial entrepreneur CEOs) in our portfolio and frankly they are easier deals to do. But when you are backing a young, and most likely first time CEO, then you really don’t know if they can drive the car all the way to the finish line.

So it’s important to observe them in the CEO role. Do they communicate well? Do they excel at having difficult face to face conversations with their team and their investors? Do they hire well? Do they move quickly to get rid of problem employees? Do they think about the people side of the business most of the time? Do they have a sense of urgency? Do they command the respect and loyalty of the entire team?

Those are the kinds of things I look for in “long term” CEOs. Of course they need to be able to set the long term strategy and vision and hold the company on that line. And they need to be able to raise capital and manage a Board and investor group. But frankly I think that many young founders are pretty good at those things. It’s the human piece of the equation that is so hard and so few get right.

As we create more startups with young founders at the helm, we are going to have to face these issues more frequently. And even though I’ve been doing this venture capital thing for 22 years, I honestly can say that I don’t feel that prepared to deal with these issues. They are hard. And each one is different. But in order to build the best companies we can, we need to get the people side of the equation right.

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