What to do after your company gets funded by a VC

Jeff Donahue is a good friend and battle-scarred veteran of venture-backed and private equity-backed companies. He has raised over $275M of funding for early and later stage startups and has been CFO of 10 emerging growth businesses. He's worked across the table from leading investors like GRP (now Upfront Ventures), Invesco, ComVentures (now Fuse Capital), Allegis CapitalAlta-BerkeleyInvisionSteamboat Ventures and many more. I'm thrilled that he's offered to write a Venture Financing Series. Without further ado, here's episode five. You can read episode one through four here.

VCs are compelled to be successful and generate massive returns for their Limited Partners. Their careers, egos and reputations rest on this. In short, they cannot tolerate your failure to execute as CEO, and they will do virtually anything to protect themselves from having to write down or write off their investment in your company.

Your job as CEO is to make the VCs rich, and that unequivocally is how the game is played. It often has been observed that the real entrepreneurial work commences once you get funding. 

Failed execution will result in an array of unpleasant consequences for you. It is not just getting fired and, in the extreme, getting crushed/washed out in a restart that results in your ownership of the company becoming worthless. It is also the arduous, painful, confrontational, and often-hostile process of failure that feeds on itself and distracts you, your team and the VCs along the way.  So, here are some points to help you avoid that process.
  • Understand that immediately post-funding you will be under the pervasive, relentless and proctoscopic-intense scrutiny of the VCs at all times. Because the success rate of most of their investments is low, the minute you take a VC’s money your life changes dramatically. If there ever was a profession grounded on judgment, it is VCs judging CEOs. They will judge you based on everything you say and do – everything you say and do is a marker to them – and they also will be busy reading between the lines of everything you communicate. While they love success, they are on high alert for any perceived signs of slippage or failure.
  • Be careful in how you communicate with the VCs. Don’t ever be cute in your communications with them (digital or in-person communications). Don’t joke with them and don’t try to be friends with them – save that for post-exit. Until exit, you have but one job, which is to execute on the business plan. Doing so will take care of the future, either via IPO or your company getting acquired. Of course, you will have gotten to know the VCs during the investment process, possibly quite well, but once funded a whole new relationship between you and them commences.
  • Communicate the truth, the whole truth and nothing but the truth to the VCs as your company evolves. If there is anything that destroys trust with a VC, it is hiding something from him/her. If there is slippage in the execution of the business plan, you have to rigorously document how and why it happened and what you are going to do to catch up. Undocumented slippage is ganz verboten. For an in-depth discussion, see Mark Suster’s excellent post on how board meetings should be conducted.
  • If your execution slips and remediation is not in sight, a VC will stop at nothing to terminate you, including colluding with your co-founders behind your back. Perhaps this is to be expected since the venture capital realm is one of the few investment arenas in the world where the investors (the Limited Partners behind the VCs) stand a greater than 50% chance of losing everything.   
  • VCs are very busy wanting you to be who they want you to be. Be prepared for that, and buck up. 
VCs who competently oversee their portfolio companies (see my prior post) are quick to grasp management’s failures and take the necessary remedial actions to preserve their interests. At the same time, good VCs are quick to supplement your execution with additional resources, typically highly skilled people in the areas where the company needs them. No VC wants a CEO to fail, and they will step in to help.  But, they have finite patience and short fuses.

A moral of the story might be: don’t take a VC’s money unless you really want to or have to. Bootstrapping can be bliss. The VC world can encompass a mind-boggling amount of greed and ego.  Sing to that mantra, never take things personally, and spend wisely.

Speaking of spending wisely, I remember being CFO of a start-up in London. On the heels of a stupendous Series A round from top European and American VCs, almost the first thing the CEO did was acquire a very expensive membership to one of London’s premier golf clubs. The rationale was that it was needed to entertain potential customers, vendors and partners. I perceived the membership and its rationale as ominous. I wish I ultimately had not been vindicated.

At the end of the day, if you succeed in executing, everyone gets rich – you, the VCs, employees, and other stakeholders in your company. That is a glorious outcome, and, as I noted in a prior post, the degree of difficulty of raising funding for your next venture plummets. But, keep in mind that as CEO you are the single point of failure for the VCs. Key members of your management team can be deemed culpable as well, but it is your fault for having not overseen them. The only bulls-eye the VCs have is painted on your forehead.