A short ride | The trials and tribulations of a venture capitalist turned temporary CEO
A couple of issues back, I described my plans to take a shot behind the wheel of Foneshow, one of the companies in which I invested in 2007. The founder fled the Portland company, which develops and delivers audio content to mobile phones, earlier this year, leaving investors with bad and worse options: The bad was to try to find a way to salvage a driverless car (company) with limited gas (capital); the worse was to leave the car where the founder left it — abandoned. I wrote in that article about my decision to take the wheel with a few bucks worth of gas (investment) in the tank to see if I could find an open road (new plan) and a gas station (new investors or buyers). After looking at the cost of the ride and the distance to the open road, investors decided that it did not make sense for me to jump in after all. As I described my optimism over the prospects of that role in the earlier article, I am compelled to share the process of the u-turn.
The challenges I faced in jumping into the driver’s seat were not trivial. First, this was not going to be a full-time role for me, because I get paid by my fund to manage a portfolio of companies, not a single company. From the perspective of putting in the same heart and soul a real founder would put in, this situation was going to be limited by my limits.
Second, having invested a meaningful amount of capital in this venture, my investors and I were wary of putting bad money after good, and decided that we needed to minimize our initial outlay in this restart to ensure that we could support the unusual decision to put me in the CEO role. And third, we knew we’d have a tough sell with future investors and/or buyers who wanted to acquire a team, not just a technology service.
The bet went like this: If we could limit our capital investment, if we could find a virtual team or one that would bet on what we thought, and still think, was a great application with outsized potential, and if we could find an angel group or VC fund that saw things as we did, we might have a shot of surviving the loss of the founder. Here’s what happened over the two months since I described the decision to jump in — and then out of — the car.
Hitting the brakes
As often happens in these situations, the departing founder had checked out several months before actually leaving. When we started to pick up the pieces, we found a legacy of challenges and obligations that would end up more than doubling the restart cost we’d projected and authorized.
When a founder decides that the economics of leaving are more compelling than the economics of staying, his motivation to leave in a responsible way may be outweighed by his perceived obligation to do what’s right for him. So, like homeowners who abandon the houses they can no longer afford and don’t bother cleaning them up for the new bank owner, the company was a bit of a mess when investors came in to evaluate what options were available.
Also, it became clear that investors would need to spend more to make this mobile service valuable to its prospective customers — the product was not finished in many ways and so could not be sold as is without some additional customization. While the product worked well in a general sense, many prospective users wanted to see additional features and customizations that would need to be funded. These features would add more cost to the limited funds available for the planned restart.
Finally, as I began the process of presenting myself as the interim CEO of a company with no employees, it became clear that the probability of this being a barrier to interest was high. As an investor in early-stage ventures, I know that I’d be looking skeptically at a venture with no management team and a VC at the helm.
And while there are adventurous early-stage investors with available capital and a stable full of entrepreneurs-in-residence, the combination of all these elements led the investing team to decide to let the founder’s decision determine the fate of the company he’d started and we’d funded.
Failure is a hard but necessary component of a venture ecosystem. So, while it is more than a bit disappointing to see any company in which I’ve committed funds, time and energy fall, it’s critical that early-stage investors keep at it. Innovation and entrepreneurship are a federal priority that will help drive our small-business economy out of this current slump and help keep our region and nation competitive.
Michael Gurau is president of Clear Innovation Partners, a Freeport-based cluster development organization; he also manages CEI Community Ventures, the early-stage fund that backed Foneshow. Reach Michael at mgurau@clearinnovationpartners.com. Read more Venture Builder here.
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