Stakeholder alignments | Venture investors wear many hats, and that can cause multiple conflicts
In my line of work, I fund and help grow companies working with and for many stakeholders — investors (private companies, the federal government), employees (those my fund employs, those employed by the companies I fund), the communities and regions in which my companies are located, fellow board of directors members, and my own fund’s investors and board members. Not terribly unusual, I suppose. Many professionals wear different hats and assume different perspectives. On occasion, however, these perspectives don’t align and there are real conflicts of interest.
An example: As part of investing in a company, I require a seat on the board of directors. In this seat, I bring my role as an investor to the table to honor my commitment to my investors to optimize financial performance of the fund. But I also have to juggle another motive — as a board member, I have a fiduciary responsibility to the company. These two purposes sometimes push me toward different conclusions. There are times when my investor perspective may conclude it’s time to sell a business, whether to realize value or to cut losses, or both. Selling for a great return for all tends not to cause much conflict, other than from stakeholders who want to hold out for more.
Sometimes, however, the investment hasn’t gone well and I may conclude that selling sooner than later will preserve more value than waiting. Here’s where my multiple hats can get me into trouble. Typically, the founder/CEO of the business is inclined (often with the support of his board) to continue on in hopes of turning things around. As a member of the board, I might well feel more positively about a strategic decision like this one than I would as a skeptical professional investor. Investors have too often seen this movie before — the entrepreneur continues unfailingly to believe that success is just around the corner.
Perspectival quandaries
Entrepreneurs and business owners, too, often find themselves in what I’ll call “perspectival quandaries.” Here’s an example: An entrepreneur raises an amount of capital from my fund to achieve a certain level of growth over a certain period of time. But while executing the plan, the business owner falls short of revenue and maintains or adds to his expenses. The result is the company burns through the raised capital quickly and achieves less than planned. At this point, the entrepreneur is trying to balance his many roles:
CEO: Repeated failure to deliver on plan is rarely a confidence builder for investors and directors, who are obliged to look out for the interests of many stakeholders. So the non-performing entrepreneur may be concerned about his job and the jobs of his team and employees.
Key shareholder: Whether a founder’s stake came from capital provided by that founder or with the support of family and friends, the individual looks at his stake in much the same way as outside investors do — is it appreciating or depreciating? What’s it going to take to retain and add value?
Co-worker caretaker: Apart from a founder/CEOs job and investment stake, he often feels an obligation to those employees who have signed on, often at lower than market wages, to help realize the dream.
Director: Like the investor, founder/CEOs of venture-backed companies often secure a seat or two on the board of directors and so juggle the personal versus professional dilemma when deciding what is in the best interest of investors but not of the company, or vice-versa.
With luck, most or all perspectives align, allowing for straightforward decisions. But sometimes things are not so straightforward. Entrepreneurs and investors can at times give greater privilege to one perspective than another, like when an entrepreneur knows the company is in trouble but fights efforts to make rational decisions given understandable concerns about their ownership stake or that of their friends and family. Investors can seem ruthless about decisions such as these, given concerns about fiduciary obligations to our investors and preserving value for all stakeholders. This type of conflict can be particularly challenging in that there is no objectively correct answer, just the perspectives of the eternal optimism of an entrepreneur versus the skepticism of a venture investor. An experienced investor tends to believe that they have the right perspective on the future. But try telling that to an entrepreneur who has put heart, soul and everything they are worth behind their “baby.”
So, what’s to be done about perspectives? I spend a lot of time clarifying ours up front, hence the word “clear” in my fund’s moniker, Clear Venture Partners. I try to be as honest and transparent as I can about my expectations, the consequences and the hats that I wear that might cause me to appear to be Jekyll one day and Hyde the next. I also spend sufficient time with company owners ahead of and throughout the investment relationship to keep communication lines open.
Michael Gurau, managing general partner of Clear Venture Partners in Portland, can be reached at mg@clearvcs.com.
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