Is it possible to predict in advance if a particular CEO will work well with venture capitalists? Or are conflicts between the two sides inevitable?
The first 20 minutes of my diagnostic interview with John (not his real name) nearly put me to sleep. His software could do this; his software could do that; his software could do everything a human-resources director could ask, with the exception of getting new hires in the door. So why, I kept asking myself, if his software was the miracle tool that he claimed, did John ask to meet with me to see if I could help him control the panic attacks he was suffering in anticipation of taking his start-up public? When I pushed him, the reason he was visiting me became clear: John loathed, and to some extent feared, the idea that he was about to lose control of his business to a board of directors imposed on him as a condition of getting the venture capital he needed to go public.
John's anxiety, it soon became clear, came from a morbid fear of all authority figures who had the temerity to get in his way. I knew instantly that John would self-destruct within weeks of taking his company public. Sadly for him, he went ahead with his plans, and that board of directors did take control of his business. He ended up in litigation.
Roughly six months after my disappointing meeting with John, I received a call from a venture capitalist I'd met at a conference. I was shocked to learn that he knew I had done an evaluation of John and had advised him to sell out rather than try to run his business under the thumb of a board controlled by the VCs. He knew all this, I discovered, because he was one of the VCs who'd funded John's initial public offering.
Then the VC, who said his association with John had cost him more than $3 million, asked me if I would be willing to help him "prevent another bath like that" by working for him. Thus began my career as a matchmaker.
My first assignment: to determine if an entrepreneur whose company was about to receive a major monetary infusion would mesh with the directors that the VC would install on the business's board as a condition of the funding. So first I chatted with the board for about two hours, determining that they were all essentially normal men with high self-esteem who thought more about return on investment than about the value of the businesses they thought about backing--just what you'd expect.
Then I met the entrepreneur. Given the VC's penchant for investing in high-tech start-ups, I feared that my first "case" would be like John, a technophile who lived and breathed software. Was I ever wrong. Kevin (not his real name), the entrepreneur, was central casting's prototypical corporate suit: from his Sloan School M.B.A. to his Brooks Brothers wardrobe, this guy was more Arthur Andersen than Route 128 skunkworks prodigy. A VC's dream, right? Wrong.
When I thought he was central casting's prototype, I was right on the money, because this guy was the consummate actor. I believed he was duplicitous and, I feared, self-delusional. "Look," he had told me, "if I can't take constructive criticism, I won't last in a market where what's hot shifts on a day-to-day basis." That sounded too good to be true, so I maneuvered the conversation around to the question of why he had set off on his own in the first place. It turns out that his father was a sadistic man who, as far back as Kevin could recall, had chided him for being a "pansy." His dad, a semipro football player, engendered a rage in Kevin that boiled just below his Turnbull & Asser shirt. My years of psychoanalytic training weren't necessary to tell me that Kevin would rather eat bees than again be in a situation in which a "Neanderthal" could use "muscle" (money in the VC world) to negate Kevin's intellectual superiority, as his father had done.
Seeing Kevin's latent rage, I advised the VC to drop the deal or buy the company outright. Unfortunately, the VC's partners rejected that notion and proceeded with the deal. But it didn't take long for a blowup to occur: some power struggle (over a trivial item) turned this ostensibly unflappable boy genius into a raging lunatic, and the deal was scuttled.
Over the course of the next eight months I evaluated the "marriage" potential of roughly a dozen more entrepreneurs. By and large they were midrange don't-fence-me-in types. Most of them were pragmatic enough to be malleable and seemed amenable to taking guidance from a board handpicked by a VC, because their need for funding was stronger than their need for freedom. I deemed only one a bad fit.
Yet I soon realized that my services to the VC were unnecessary. He really wanted me to serve as a risk arbitrageur, not a shrink. All I was doing was confirming what we already knew: entrepreneurs are often headstrong control freaks (in a laissez-faire way) who march to a very different drummer. "Think Different," the new Apple marketing campaign from the fabled entrepreneur Steve Jobs, sums up that mentality. VCs can't change that, but they can work with it. The key to making the unnatural marriage of VCs and entrepreneurs work is to accept--even celebrate--the differences, and keep one another at arm's length.
But even if you do adopt a healthful vive la diffÃ‰rence attitude, remember that there are several characteristics on which entrepreneurs and VCs will never match up.
Risk. This is a stimulant for the entrepreneur and poison for the VC. Granted, the term venture suggests a risky journey, but all of the pretrip planning is designed to minimize this element of the outing.
Control. Here, oddly, the VC and the entrepreneur think exactly alike; they both crave it. Consequently, they must both share it, which, I found as a matchmaker, neither party is by nature programmed to do. Turf must be clearly demarcated before you let a VC give you money, or conflict will overwhelm you in your bid to take your business public. Similarly, to do an IPO, you must give up some control--often a substantial amount--of your baby.
Name recognition. This is the arena in which compromises between entrepreneurs and VCs are most readily negotiated. Only a few VCs need their name in lights; the vast majority are content to keep a low profile as long as they pocket huge profits. Entrepreneurs, on the other hand, often want their names linked with their businesses' logos and seek public recognition.
I'm no longer in the matchmaking game; I like to think that it's impossible to do it with precision. Besides, when it comes to VC-entrepreneur matches, conflicts are inevitable. But VCs and entrepreneurs can coexist if they mitigate, but not eliminate, discord. What must be accepted as gospel is that entrepreneurs are strange bedfellows for almost everyone, but for the VC who can negotiate a modus vivendi for getting through the night with them, the rewards afforded by their "Think Different" approach to life are limitless.
Dr. Steven Berglas is a management consultant and a psychologist on the faculty of Harvard Medical School.