An Ugly VC-Founder Story
All characters appearing in this post are fictitious. Any resemblance to real persons, living or dead, is purely coincidental. Also, no animals were harmed.
This is the story of a founder… A leader with a great market and product vision. He is always thinking ahead of the competition and with his tech co-founder, they are executing fast and well.
The traction is good, the engagement is growing, all the pieces they have built and put together over the years are proving them right. The stars are aligned to build a successful & lasting venture.
However, there is still a long road ahead and the company still lacks solid managers to master two critical areas that are business and finance. In order to fuel the growth and to structure the company towards a bright future, the company raises a €5M series A round from a VC (they had already raised a seed round).
That was few years ago.
To provide you with a little bit of an overview about investors and what entrepreneurs can expect from them, here is the thing: The investor’s job, besides investing money, is pretty simple:
To listen and to ultimately ask the right questions in order to drive constructive discussions and thinking processes;
To empower the CEO/Team by sharing with clarity and perspective behaviours & patterns that he/she has observed among others;
To kill the noise in order to help the founders focus and think things through;
To provide actionnable ressources and to open his/her network of experts;
To raise clearly his/her concerns with honesty and benevolence.
Under no circumstances an investor should interfere, decide or run things in place of the founders. Never. The right to veto (in shareholders agreements) exists to block, not to act. And there is a big difference between those two.
The opposite thing happens in this fictional story, transforming a fairy tale into a tragedy. To spice the story up, this venture capitalist has no expertise whatsoever regarding the market on which the company operates. However, the founders have trusted him (for some reason), and unfortunately he has failed them by:
Running the company financial strategy and telling the CEO not to worry about it, doubling down the money at a stupidly high valuation;
Telling the CEO not to worry about the business while it’s key in this business, and to stay focus on the product;
Advising the CEO to take the same lawyer as the VC firm;
Mandating a temporary CFO who has failed to structure the financial department of the company;
Deciding which Advisory Boutique would run the fundraising process which failed at its mission;
Driving the pitch deck orientation that has also failed to convince anyone out of 50 investors;
Some people will say that the CEO is responsible for letting those things happen. Well, the investor should have empowered this amazing entrepreneur and turned him into an amazing leader. He has failed so far.
You want to know how the story ends…
The CEO has finally found, by himself, an investor willing to put 5M+ on the table, at a very low valuation. The VC has taken the lead back from the CEO in order to take money out of his mess… Leaving the founders with very few shares of the company and no control of the board.
Other options could have saved the whole situation, for the founders, the companies, and also the investors. The VC, as well as the M&A boutique (mandated by VC), blocked them.
The VC is responsible. The founders are paying for it. The future does not look bright anymore.