Month: March 2008
Today’s great post is from Josh Kopelman and is titled I Don’t Know. In it he describes two meetings and explains the key importance of founder credibility – and why the founder in the second meeting had much more credibility than the one in the first. Oh – and he nudges all of his know-it-all VC colleagues also.
Q: Can you please clarify the distinction between the roles of a CEO and a COO?
I had my own impression of the roles of a CEO, which included managing and motivating the team as a whole and ensuring the execution of day-to-day tasks.
However, after speaking with a mentor, who has been a CEO and a COO of Fortune 500 companies, he informed me that the CEO’s roles are first and foremost, obtaining financing (a large majority of the CEO’s time), along with setting the vision, followed by finding talent and creating alliances. Additionally, the CEO should guide top-level management, but not be very involved in the day-to-day.
The COO is supposedly responsible for ensuring the execution of all of the day-to-day tasks necessary to achieve the company’s vision, managing the company’s non-senior level employees, and "making things happen."
Can you please confirm or refute the roles as defined above, and provide an explanation? Additionally, can you please mention some of the necessary skill sets that each role requires (e.g., CEO: strong grasp on finance, general knowledge of all aspects of a business, etc.).
A: (Jason) There isn’t really a definitive answer to your question. In my opinion, you are both right. There are two components which weigh heavily into what the CEO / COO distinction is, but there are others too.
The first question to ask is "what stage is the company in its lifecycle?" Many early stage companies don’t have COOs, so the CEO is doing "all the above." See Brad’s recent post on why he doesn’t like COOs in early stage companies. In later stage companies (especially Fortune 500 companies) you’ll usually see the CEO as the "front man" in organization with investor relations, overall culture, vision and strategic direction being very important, while the COO, or other operations person (CFO or General Counsel) responsible for more other day-to-day tasks.
The second question is what "style" the CEO employees, as well as what his/her previous area of expertise is. Some CEOs are master delegators to their executive staff. Some are detailed orientated and want to be involved in every decision. This is purely a factor of management style. Furthermore, depending on where a CEO "grew up" experience-wise (sales, tech, marketing, finance, etc.) you may see them be more or less involved in certain functional areas.
So there is no "one size fits all" CEO job description. And because of this, there really isn’t a "necessary skill set." I think for all CEOs it is important that they are good communicators, create a healthy culture at their companies and are someone who inspires – both employees and the outside word alike.
Q: Say I have an angel (SEC accredited) who’s ready to invest at an amount well below $100k. How would this impact on a future round with VCs? Is there some standard or average pre-money and post-money that happens in angel deals? Also, the angel in question is a family member of a friend, so would it be better to have them invest as a family/friend financier rather than an angel, and how exactly would that work?
A: (Brad) Let me address the last question first. There is no real difference between a "family/friend" investor and an "angel" investor other than semantics. Structurally and functionally they are doing the same thing. Now – there might be an emotional difference when you have to see your "family" at Thanksgiving, but that’s it.
Regarding how a VC will view this, sophisticated VCs are used to having angel investors as early investors in your company. Your life will be made easier if you treat the angel investment as a real investment and document it legally as such – I’ve written about this in What’s The Best Structure For A Pre-VC Investment.
Insuring that your angel investors are accredited is important as this is likely one of the things that will matter to the VC. If your angels can be specifically helpful to your company (because of their background / experience in companies similar to yours) you should make sure the VCs know about them. In addition, you should try to enlist your angels in getting you connected to VCs that they know and have worked with.
Finally, there is no standard pre-money/post-money in angel deals. We typically see pre-money ranges between $1m and $3m for angel deals, but they occasionally go higher and sometimes go lower. Be careful not to price the angel round too high as the VCs are going to likely ignore the angel round pricing and – if they price their round lower – it can be a difficult conversation with the angels who supported you early on.
Today’s guest poster is Frank Ronchetti, CFO of a local startup in Boulder. His “ask the vc” question became more of an observation and I thought that I would post in its entirety and then comment below. Frank, you have the floor.
Are VCs incompetent or just inconsiderate? Not all venture capitalists mind you, just the ones who solicit your proposal, read your executive summary, or even meet with you, and then you never hear another word from them. What’s up with that?
There is a subset of the VC community that will just go silent at some point and you never hear from them again. I have raised venture funding for a few companies, and I would estimate this number at around 10-20% of all the funds I have approached. The Berkshire Hathaway annual report’s Acquisition Criteria section always contains the quote, "When the phone don’t ring, you’ll know it’s me." But that only applies where someone looking for funding doesn’t do their homework and sends in a proposal that doesn’t meet their criteria.
The problem in the VC community is broader than that. I have seen potential investors go silent:
- After researching their investment criteria and seeing that we may be a good fit.
- After getting an introduction to the fund from a respected referral source.
- After communicating with a partner who said, “This looks interesting. I will look at your executive summary and get back to you.”
- And even after having a conference call or face-to-face meeting to go through our business plan in detail.
If silence always meant rejection, then this wouldn’t be such a problem, other than the fact that I waste my time making multiple calls or sending several e-mails to follow up. But silence doesn’t always mean rejection. I have spent literally weeks trying to get a response from a VC, only to hear, “Thank you for being so persistent. We remain interested, but we’ve been swamped / we just closed our new fund / an investment committee member has been on vacation / etc.” The process has then continued. So you can’t just give up.
My strategy when I get the silent treatment has been to leave a series of three to five messages (depending on the quality of the introduction or level of previous engagement) with the last one politely saying, “This is the last time I’m going to call.” But boy, what a waste of time this is. Entrepreneurs bust their butts and spend dozens of hours writing business plans, arranging investor meetings, and preparing and making presentations. Venture capital fund managers owe them the courtesy and respect of making a two-minute phone call to say, “No thank you.”
Thanks Frank, that is indeed frustrating. So what’s the deal? Here is my take:
I’ve always taken the approach (as does my co-author Brad) that you try to keep communication as efficient and responsive as possible. We regularly say that we will return any email that we get, but also caution that phone calls are much harder to return. I think there are two takeaways from this: first, whomever you are dealing with, try to find out their preferred mode of communication and two; I don’t necessarily think that we represent the norm when it comes to responsiveness.
We also try to say “no” as quickly as possible to deals that we are evaluating in our pipeline that aren’t going to be funded by us. There is no use keeping the entrepreneur on the hook if you aren’t going to fund a deal and we try to come to the “no” decision as quickly as possible.
I agree, Frank, there is a lot of bad communication “mojo” in the venture world. In fact, I see it too. I’ve seen countless times where VCs have been unresponsive to entrepreneurs, other VCs, or even their own portfolio companies.
In fairness, keep in mind that most good VCs are reviewing a massive amount of emails, business plans and proposals, so there are times when one can get buried. Take for instance the situation where one of my companies is in the middle of a sale process, while I’m in fundraising mode and moving into a new office. (That actually happened to me last fall). I’m clearly going to get slower in responses, but this normally affects timing by days, not weeks, as you mentioned above.
Okay, I haven’t answered your question: Are VCs incompetent or just inconsiderate? I think it’s more of the latter than the former, but ineffective communication styles, in my opinion, will eventually affect a VCs returns as reputations do matter in this business.
Jeff Bussgang has today’s great post up titled Let’s Play "Blame The VC." It’s something that regularly confounds VCs and entrepreneurs alike. The punch line:
"Then, when you don’t get funding, play "blame the VC". Tell all your friends that those risk-averse idiots wouldn’t know a good deal if it hit them in the face. And especially the ones in [insert your geography here]."
Jeff does a good job – in a relatively self-deprecating way – of dissecting this endless discussion.
Jason Calacanis has today’s great post up titled How to save money running a startup (17 really good tips). I don’t necessarily agree with all of them and they won’t all work in all cases, but there are some good nuggets in there.