VC Carrot and Sticks: It’s all about soft power
It will soon be 3 years since I left Facebook to set up White Star Capital. On one side it feels like a long time, on the other, I am still a “newbie” in a business that requires a decade to confirm whether conviction on an investment panned out (or in VC investor lingo, I’m still an “emerging manager” and will be so for many years to come).
I’ve shared some thoughts on the lessons learned thus far, on the amazing intellectual stimulation this role provides and on the gap between the timing to cement an investment and the potential exit many years down the road.
One lesson I’ve learned over the past three years centers on the role VCs play with founders and how different it is from being an operator. In operating roles if something needs fixing or there is an opportunity to be tackled, you take it on, or you rally your team to take it on. You have the right and the responsibility to take it on. As a VC, a minority shareholder, and perhaps a Board member, your role is very different. You have lots of carrots (soft power) and one ugly big stick (stop funding or push for leadership change).
I would argue that success as a VC comes from learning to wield the soft power in alignment with the entrepreneur.
Soft power means building trust with the entrepreneur so that your advice might carry some weight. Soft power means having a direct and transparent line of communication with the entrepreneur to openly discuss challenges and opportunities. Soft power gets built by seeking to add value through tangible operational insights rather than the “flavour of the month” (ex: “What IS your chatbot strategy?”…). Soft Power needs to understand the roles and responsibilities of the VC as a minority investor and the CEO as the leader of the business. Soft power, if exercised correctly hopefully means that the stick never needs to be used.
I have seen founders who rely too much on investors to define the strategy of their business… They see us as operational extensions of their firm and therefore ask for open debate at Board meetings on “strategy” (NB: Not something I suggest if you want to keep Board to allocated time window). In the opposite extreme I have encountered CEOs who see an investor and a Board as a necessary evil: Report what they want to hear but do it your own way anyways (NB: Not something I suggest if shit hits the fan and you want supportive partners when it all comes to light).
The best experience has been a middle ground where the CEO has a clear vision of where she wants to lead the company, and is relying on the investors as a sounding board, borrowing from their experience, network and pattern recognition to validate her intuition. My input in that scenario, is a soft influence on direction, but the operational direction is still accurately controlled and defined by the founder.
I know that the analogy to the carrot and stick is not perfect, and especially not so in situations where things are not going as planned. This leads me to the last insights I have gleaned in the last few years: “No Surprises”! If you surprise your investors at a Board meeting with unexpected news (big client just cancelled contract, key management team member just left, cash is about to run out, that VC that “loved you” pulled out on the round) you should expect some groping around for that stick. Conversations should be ongoing and regular and key disclosures should be shared openly and proactively. We are, hopefully, all rowing in the same direction.
So, Dear Founder, keep the soft power dynamic in mind (and portfolio founders keep me honest in delivering on these lessons) …and be proactive and avoid surprises.