I just read a blog post on TechCrunch by Vivek Wadhwa, titled, Is Entrepreneurship Just about The Exit?
The post posits that venture capital investors (known as "VCs") drive technology entrepreneurs to focus too much energy on their exit strategy - either selling the company or IPO - rather than building great businesses. The article highlights bootstrapped, lifestyle businesses as an alternative approach to creating great technology businesses over the traditional VC route. It argues that the bootstrapped financing model, which is funding growth organically or from the "three Fs" - friends, family and fools, promotes the creation of truly great companies.
Clients often ask me about our investors, since financial strength is an important consideration when choosing a business partner. Bullhorn has lived through three different stages of corporate development. First, we were a venture capital-backed dotcom. Later, after refocusing our efforts to build a Software as a Service staffing and recruiting front-office application, we bootstrapped our way to profitability. Most recently, we've gone back to the VC backed approach to fund the organization's current stage of growth. Having experience with both bootstrapping and VC backing, I can say that both have their merits. But, each has its time and place. This is true not only for software companies with VCs, but for any sort of business start-up with outside investors.
Lean and Mean
Bootstrapping is a great way to build a technology business to a certain point. It forces you to learn how to be pragmatic and listen carefully to your clients. If I had to point to a single thing that drove Bullhorn's early success the most, it was that we had to win to survive. We could either delight our customers or go out of business. Anyone who started a business in 2009 probably knows exactly what I'm talking about.
Spend Money to Make Money
Bootstrapping, for all its positive effects, also has a downside, especially when it comes to technology companies. Once you've validated your business model, you reach a point where you need capital to support your growth. You need to promote and sell your offerings. You need to invest in infrastructure to be able to support your growth. You need to invest in outstanding services staff. All of these things require upfront investments. If you're too cautious about spending, you open the door to competitors. If you've proven to yourself that you've built a great business, you've probably proven it to others as well and given enough time, they'll over take you. That's when venture capital investment can help.
VCs as Puppet Masters
In the article, Wadhwa paints VC investors as driving the agenda with entrepreneurs - forcing them to make decisions that serve only their interest - driving relentlessly toward a pay day. I've heard this from other entrepreneurs: "You took VC money. Do they call the shots now?" or "How long until they make you sell?" Most people picture VCs as puppeteers - having complete control over their portfolio companies and manipulating the management team's every move. But, the reality is that most investors don't have any control over the course a company will take. They can only do two things: make suggestions to management and replace the CEO. There's no doubt that this is a powerful lever, but it's really the nuclear option.
Let's Not Fire the CEO
Most entrepreneurs are terrified of taking venture capital because they fear being replaced. If you've never grown a company from $1M to $100M, it's natural to be unsure about whether or not you will be up for the task. But, most VCs won't give you money if they don't believe you can make it. And, they'll usually be upfront about it if they have doubts. They invest in people just as much as they invest in products and markets and they want a big return on the capital they invest. Replacing a CEO is never easy and puts their entire investment at risk. The likelihood of finding another executive with the passion and enthusiasm of the person who built the business is low. It's really in their best interest to make it work.
Stop Listening and Start Listening
CEOs get fired for one of two reasons: they either don't listen to their investors or they listen to their investors. CEOs who don't listen to their investors are very distressing for them. If investors believe you won't entertain their input because you don't value their opinion, they'll worry that you'll drive the company off of a cliff. They've seen more companies succeed and fail than you have, so you should be willing to listen. On the contrary, if all you do is follow the advice of your investors to a T, then you're not a CEO - they are - which is also daunting for investors.
To build a successful organization, you have to be in tune with your clients, your team, your investors and your gut. If all you did was implement every suggestion your clients ever gave you, you would end up giving away your product and you'd go out of business. Clients typically don't share your perspective because they aren't standing in your shoes. So, similarly, if you did everything your investors told you to do, you'd make a lot of poor decisions. Achieving balance is critical. Your investors can be incredibly helpful in avoiding bad hires, analyzing acquisitions, thinking about sales and marketing strategies. But, unlike you, they aren't on the ground, close to the clients. They will never have the full perspective that you will. So, when they steer you in a direction that you don't think makes sense, you should acknowledge them, but tell them you disagree. In fact, it's similar to what you do with clients every day.
Exit via Brute Force
Lastly, when it comes to giving investors a pay day, whether through IPO, strategic sale or a financial buyer, investors are entirely reliant upon management to drive the agenda. Very few companies would want to acquire a company where the management team is unwilling to participate in a merger. Wadhwa mentions registration rights in his post, where investors have the right to force a company to a public offering. While it may be possible to force to IPO, it's hard to imagine a CEO trying to build enthusiasm for a public offering with a gun to his or her head. That's far from the ideal exit scenario for any investor.
While it's exciting to imagine that there's a lot of skullduggery, arm twisting and palace intrigue in the board room of venture backed technology companies, goal setting, strategic planning and pitched debate are the modus operandi. Ultimately, everyone is aligned toward a common goal: building an innovative company that delivers products and services of incredible value to its clients. Investors know that if you accomplish that, great returns will be a natural by-product.