Sunday, 2 December 2007

Why entrepreneurs can’t plan and VC’s can’t focus

OK I exaggerate- but let me explain! Over the years I’ve seen a few boardroom conflicts in early stage technology companies, and on reflection I think there’s a pattern to some of these conflicts. They arise when the company is looking to allocate resources and to plan ahead. There’s a very natural contradiction between maintaining focus on the primary business plan, and maintaining momentum towards some alternative/contingent outcome, a “Plan B” if you like. Some characteristics of a good CEO Joining a tiny company, perhaps with no sales, virtually no staff, the vaguest of customer relationships and a VC investor is only attractive if you have something of an optimistic outlook on life! That’s not to say that such people aren’t also very conscious of balancing and mitigating risk, just that you think you can see a route to a good outcome. Also, in my experience, good CEOs tend to be furiously focused individuals. Maybe the CTO can be distracted with wild ideas about the next innovation, but the CEO has to be delivery focused. Characteristics of an experienced VC VC’s need a degree of optimism too, but they have the advantage of a portfolio and expect each individual investment to be as likely to be a failure as a success. Moreover, they have been “backseat driving” to some extent on many, many, more companies that the CEOs have (I’ve been personally involved with around 25). That means that, whilst not at first hand, they’ve seen “the head of terms that didn’t make it through to cash”, the “Series A rounds that ended up as a nasty down-round”, and the “strategic partnerships that never delivered”. What’s more the VC has probably experienced the effect that many if not most of their portfolio will change direction during the early years.Fred Wilson of Union Square Ventures puts so well in his recent post: Of the 26 companies that I consider realized or effectively realized in my personal track record, 17 of them made complete transformations or partial transformations of their businesses between the time we invested and the time we sold. It’s therefore hardly surprising that VC’s will have a tendency to constantly want to seek out the alternative route or contingency plan, whilst CEO’s will want to keep the company focused. My only proposal to try and resolve some of this tension is to make sure that contingency planning is something that: • Takes place outside the normal board meetings, where everyone has the space to think a little harder about the what-ifs • That, after considering lots of options you try to focus on as few contingencies as possible: two is good! • One of these contingencies should, as far as possible, only rely on events and progress the company can, as far as possible, control directly So you can see why I believe that sometimes entrepreneurs have deficiencies in planning, and VC’s can suffer from deficiencies of focus!