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VCs Are Partners, Not Bosses May 25, 2012

Posted by Ian Cheng in Funding.
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20120525-151950.jpgMark Peter Davis

What’s up with the superiority complex exhibited by both venture capitalists and entrepreneurs?

A shiver goes down my spine when I hear a venture capitalist refer to a portfolio company as “my” company, or a CEO who runs one of those portfolio companies as “my” CEO. The implicit suggestion is that VCs are kings and founders are lowly grunts who exist only to humbly serve the capital-holding masters. Ugh.

This condescension goes both ways. It’s not uncommon for a founder to poo-poo the importance of investors suggesting financiers don’t know how to oversee start-up operations day-to-day.

As both an entrepreneur and a venture capitalist, I deeply believe that these stereotypes are not only wrong, but also foolish.

As a VC, I understand why VCs might claim seniority. After all, VCs typically join the boards of the companies they invest in, and boards have the ability to fire CEOs. So, in that way, start-up CEOs work for VCs. In addition, VCs often have the contractual rights to control a company’s destiny, especially if they hold preferred equity. VCs might be able to veto a company sale, or the issuance of any new security.

That said, entrepreneurs can easily point to another set of facts that suggest they are the rulers of start-up land:

Founders typically own far more of a start-up’s stock than any single investor.

They often represent half or more of the board, meaning that they’re the real bosses of their CEO-selves, and equal to investors in the board capacity.

And, founders usually have the loyalty of the start-up’s team.

Truth is, when you home in on the complex relationships between founders and investors, it’s difficult to untangle who is actually the boss. Each party holds different types of power in different situations–to protect both from risks inherent to each role.

Perceptions of seniority or subordination by either party are just that, perceptions. They don’t typically impact how a company is managed. The reality is that investors and operators are partners in a venture. They’re each contributing different skills, with different rights in order to achieve a common objective: creation of shareholder value.

In the end, of course entrepreneurs don’t want to be insulted or talked down to by their investors. And, investors look for entrepreneurs to respect their input and support their objectives.

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