Dear John

What happens when the venture capitalists find profit in your company -- but don't see profit in you?

Founders who go after venture capital can find themselves with bulging coffers -- but without their old job as CEO

Phil Trubey had the awful feeling that he was about to be mugged. Not by some unknown derelict on a dark street but by the well-heeled venture capitalist who was sitting across from him at lunch.

It was August 1998, four months after Trubey had received $6 million in venture financing for his software-resale business, Netpartners Internet Solutions. Since founding the company, in 1994, Trubey had bootstrapped it into a $6-million business and had developed a popular new product that enabled companies to restrict employees' use of the Web. Hoping to fuel growth and position his San Diego-based business for a public offering, Trubey had gone after venture capital and had accepted a deal led by New York City giant Morgan Stanley Dean Witter Venture Partners. Now, over a pricey lunch, the VC who had joined Netpartners' board was sizing up Trubey's strengths as CEO. That assessment made Trubey fear that everything he'd built was about to be snatched away.

The VC bluntly informed Trubey that Netpartners had outgrown the founder's management skills and that senior executives had lost confidence in his leadership. Then came the cruelest blow. "He said, 'As I look at you, I don't get a sense that you really feel like you are a CEO," remembers Trubey. A pang in his gut told Trubey the VC might be right. "But I was worried about losing control of the company," he says. "I pushed back and said, 'No, no. I want to be CEO. I can learn."

Looking back, Trubey realizes it was pointless to put up a fight. The VCs hired a management consultant, who swiftly compiled a report that sealed Trubey's doom. A few weeks later Trubey found himself voting in an interim CEO (picked by the VCs). The new man told the board that he would assume the helm only on the condition that he could fire Trubey -- which he did, right after the VCs sought (unsuccessfully) to wrest a majority equity stake away from the founder. "It became an untenable situation," says Trubey, now 37. "Nothing in my life had prepared me for that."

In the end, Trubey and his company emerged from the ordeal significantly better off. A new permanent CEO took the company public under the name Websense Inc. Today the business counts 239 of the Fortune 500 and 10,000-plus other corporations among its customers. "It was a very painful situation for Trubey, but the outcome has been phenomenal," says a Websense board member. Still, Trubey's story is a cautionary tale for any founder eyeing outside investments. Having recently handed off the CEO title at his second venture-backed start-up, Trubey faults his own inexperience for much of his misery at Netpartners and urges that other entrepreneurs wise up to the hazards of venture financing before accepting an investment. "You don't know what you don't know," he warns.

Like it or not, if you opt for venture capital, the day will probably come when your investors will shove you aside. Granted, there are notable exceptions; Michael Dell, Larry Ellison, and Bill Gates come to mind. At most venture-backed companies these days, however, the influx of professionally managed money signals "professional" management as well. Last year alone, VentureWire recorded new picks for the jobs of CEO, president, and chairman at 925 venture-backed companies. "I've become convinced that making a management transition at the appropriate time is one of the keys to success," says John Warner, president of a VC fund in Greenville, S.C. "You need a new CEO to take the company to the next level."

That's true for established businesses, too. San Diego's Stellcom Inc., for example, had been in business for 15 years and had annual revenues of $30 million when founder Mark Fackler sought venture financing to expand the company's wireless-systems-integration service, in 1999. Nonetheless, Fackler says, VCs turned him away cold until he told them he planned to recruit managers who had a track record of positioning companies for some form of liquidity event -- a sale, merger, or public offering.

VCs, after all, live or die by the returns they earn for the institutional investors from whom they raise money. They specialize in assembling seasoned management teams. And in today's slowing economy, VC-driven CEO switches appear to be "happening more and more," says John A. Challenger, CEO of executive-outplacement firm Challenger, Gray & Christmas, based in Chicago. "For an entrepreneur, it's like you're losing your baby."

 1 | 2 | 3  NEXT