« What’s The Best Material for the Pre-Pitch Introduction to a VC | Tranched Financings »

What Do I Say When I Don’t Think A Founder Will Be An Effective CEO?

Q: One of your deal screens that you mentioned was “comfort with the people involved.”  What do you say to the entrepreneur when that is the main factor that steers you away from a deal – e.g. the situation where there is a clear sense of discomfort in your gut with the ability of the founder to be an effective CEO, and yet that CEO doesn’t recognize or admit his/her own weakness?

A: (Brad) There are actually three cases here: (1) I like the deal and the founder, but don’t think he can or should be the CEO, (2) I don’t like the deal, but I like the founder, but don’t think he can or should be the CEO, and (3) I don’t like the deal or the founder (or – usually – I don’t feel any connection to the founder.)  Let me address each of these separately.

Case 1: I like the deal and the founder, but don’t think he can or should be the CEO: When I realize this, I immediately sit down with the founder and have an open discussion with him about this.  For example, shortly after I started spending time with Greg Reinacker (the founder of NewsGator), I realized I really wanted to back him, but not if he wanted to be the CEO.  Over dinner early in our discussions, I told him this directly.  I recall him being guarded in his reaction (I’m sure he was thinking something like "who is this asshole?")  I explained my point of view, was clear that I would completely understand if he wanted to be CEO (in which case I wasn’t a good candidate for funding), but encouraged him to talk to some other people "like him" (who I viewed at "CTO / founders from central casting.")  Greg went off, thought about things, talked to a handful of folks, and came back a few weeks later and said something to the effect of "Brad – you are right – I don’t want to be a CEO – let’s go find a great one together."  Needless to say I went ahead and funded NewsGator and have had an awesome time working with Greg, the CEO we worked together to identify and bring onto the team (JB Holston), and the rest of the NewsGator crew to create an awesome company.

Case 2: I don’t like the deal, but I like the founder, but don’t think he can or should be the CEO. In this case, I pass quickly but offer to give the founder (who is often someone I know from another context) some constructive feedback if he wants it.  If he takes me up on it, I try to be very thoughtful in delivering a direct message that he should have a different role than CEO.  I’m clear that identifying and bringing on a great CEO won’t change my view that I’m not interested in funding the company, but that I think it will help him be more successful in building the business.  This is the most difficult case for me because it’s a one way, open loop situation.  I’m delivering bad news and difficult to hear feedback, but I’m not providing any future willingness to engage as an investor.  Occasionally I’ve encountered a negative response from the founder and in one case I changed my mind after a CEO was brought on board and ended up funding a company, but usually my directness and candor is acknowledged and appreciated.

Case 3: I don’t like the deal or the founder (or – usually – I don’t feel any connection to the founder.)  This is the simplest case for me.  I pass and usually don’t give much additional feedback.  In most of these cases, if I didn’t feel a connection to the founder, he probably didn’t feel a reciprocal connection to me and we generally each just move on.

April 8th, 2008 by     Categories: Founders