The Interpersonal Dynamics of VCs & CEOs: Keys to Fostering a Healthy Relationship
How knowing your role can ease tensions and help you best support your founders.
In our coaching practice, one of the most common questions we receive from investors is, “How do I build more trusting and impactful relationships with leaders in my portfolio?” (On the other side of the table, the common questions we get from CEOs are: “Why does my board act like that?” and “How do I deal with my investor/s?” See our previous posts on that topic below.) As coaches, we believe the core challenge that limits the ability of founders and investors to connect in a more collaborative way is rooted in the dynamics of power.
The interpersonal dynamics of the VC and CEO relationship are many-storied. Often, the plot line involves situations and behaviors that erode trust and create relationships wrought with tension. Entrepreneurs are hesitant to trust their board investors, and navigating the power differential and investor personalities is an added stressor for founders who have raised capital. The power dynamic inherent in the VC—CEO relationship puts VCs in an up-power position. This dynamic is amplified by economic uncertainty and other macro forces external to the business.
It’s not surprising that investors exercise their ‘up-power’ position in service of their objectives. That’s their job as venture capitalists. Yet, when founders don’t see eye to eye with those objectives, tension can arise.
(Learn more about the impact of power dynamics and how that affects your role as VC in this short episode of the Reboot Podcast in which Dan Putt and Andy Crissinger define the three dimensions of power and share their advice for navigating power differences to build better founder-investor relationships.)
“One of the things between VCs and founders that often goes unsaid is around inherently different underlying objectives, which if not aired can lead to both conflict and mistrust,” noted Reboot coach and facilitator, Mary Janowitz. “Many if not most VCs are less interested in their portfolio companies’ long-term viability and success as a profitable ongoing business than they are in their growth potential over a relatively short period of time, sometimes only a few years that will lead to high multiplier exit. Yet, growth alone does not make a successful business, and high X growth is rarely possible over time.”
On the other hand, some founders are also more interested in high growth and valuations towards a strong exit and want to achieve that even if the company is not yet profitable, leaving the evolution to future owners who want to build a business. Other founders do intend to grow a thriving business that can be cash-positive and profitable, employ a strong workforce, and achieve impacts in accord with their mission.
If the VC and the founders are not aligned, the loss of trust and conflict grow.
As a board member and investor, how can you establish generative relationships with your founders? Being aware of the relationship dynamics that are in the room, along with a few essential communication skills, can help you be most supportive of your founders in accordance with your role and intersecting interests.
Invest in a relationship built on trust.
Trust between investors and their founders is a marathon, not a sprint. Building trust in a relationship is something that needs constant tending. One of the things to realize about your role as VC and board member as it relates to your founders is that you are in an up-power position. This naturally makes trusting your investors hard to do as a founder. It’s common for some founders to assume their investors are primarily concerned with making money at the cost of all else or realizing their profitable outcome through a different path.
- Do your portfolio companies know what you care about?
- Do you have a connection with them outside of the boardroom?
- Do you know who they are?
- Do your founders know who you are when you don’t have your VC hat on?
Trust can be tricky if your founders don’t know what you care about as a human and in your role as a VC. Odds are good that if your founders don’t hear it from you, they’ll assume the worst regarding them (your motivations?) and their company.
On the flip side, can you trust your founders? What’s your level of trust in their acumen, experience, and ability to lead and manage? There is a formula for trust. Most of the time, we leave this unexamined, and we either trust someone or we don’t.
Learning the components of trust can help you understand what parts are missing from a person or situation to identify more clearly what’s causing you concern. If you can name it, you can address it. Often, when trust is in question, one or more of these things is lacking: Sincerity, Competence, and Consistency.
Identifying Unhealthy VC/Founder Dynamics
Unhealthy dynamics can begin on both sides of the table. Learning how to recognize some of these behaviors can erode trust.
Here are some founder behaviors that can raise eyebrows on the board are the following:
- No updates are made between board meetings which often has the impact that a board member starts to assume the worst.
- Founder does not make requests of the board on where the board can help.
- Founder does not make requests of the board for support to bolster their skills and grow in their leadership.
- Founder asks for solutions rather than presenting the board with scenarios and inviting discourse on the best past forward.
- Founders are afraid to share bad news with the board out of the fear that it means they are doing something wrong or don’t know what they are doing, and only present or overemphasize the positive.
For VCs, here is a sampling of behaviors that create unhealthy dynamics with founders:
- When VCs get too into the weeds of the business (which can come from good intentions to help) and try to operate the business for the founder, it can create an unhealthy dependency and an unscalable business or an unscalable founder. A VC too in the weeds can also insist on actions against the CEO’s choices.
- When VCs are too removed from the business, they tend to just give advice at board meetings, but the advice and suggestions are out of context. In Reboot Podcast Episode #164 — How To Be a Stable Board Member — with Aileen Lee & Brad Feld, Aileen, Brad, and Jerry discuss in depth what makes this problematic behavior and how to counter it with something more generative.
- When a VC does not ask enough questions and gives too much advice based on “The super company,” it may not be a match for the company you are currently on the board of. An example of this behavior is: “If you just had sales like company X, recruiting like company Y, and engineering like company Z, you’d create the super company.” But let’s be clear: that is a super company that no one company actually has.
Reflection for VCs (and founders):
- What do you know about unhealthy VC/founder dynamics?
- What have you experienced?
- What behaviors have you seen?
- How did that impact your level of trust?
- If the situation made you uneasy, how did you react?
Relational Skills for Healthy VC/Founder Dynamics
When it comes to cultivating trust, relational skills such as communication, asking better questions, listening in new ways, and staying regulated are essential, for both sides of the table. Additionally, being able to identify ways the dysfunctions, such as ways the communications are breaking down as noted in some of the examples above, help you to know where to begin diagnosing the breakdowns, giving direct feedback, and then working towards a better way of working together. Here are a few tools to bring with you:
- Be more of a coach than an advisor. Adopting skills such as good listening and asking open, honest questions can help you build essential rapport and be a better-sounding board to your founders. (For an overview of core ‘coaching’ skills to bring into the boardroom and conversations with your CEOs, listen to this podcast on “Leader as Coach” with Andy Crissinger and Chris VandenBrink.)
- Encourage your CEOs to think deeply about their problems and propose potential solutions, and then act as an editor. You can fill in the “blind spots” of their solutions based on what you have seen elsewhere, but you’re letting your CEO lead with their thinking, logic, and plan.
- Leverage storytelling more than advice. The power of a story is multifold. For the listener, it lights up so many areas of the brain and enhances learning. As the storyteller VC, you are not being directive with advice but still teaching the lesson.
- Ask the questions that matter. Good questions deepen the ability to think and don’t put folks on the defensive. The power of asking an open and honest question, not a question that’s “leading the witness,” creates new pathways of thinking. This, in turn, creates a more resilient CEO and results in better outcomes. To do this, use “what” and “how” questions and delete “why” from your vocabulary. “What” questions are about ‘data’ and “how” questions relate to ‘process,’ both of which are actionable responses. Asking “Why” often puts someone on the defensive, creating an emotional rationalization that may not be rational. Also, a question that begins with ‘Don’t you think…’, isn’t a question. (For more on Open Honest Questions, check out the Reboot Podcast Episode on Inquiry as a Leadership Skill — with Andy Crissinger & Chris VandenBrink)
- Employ the Outcome Frame. The Outcome Frame is a framework of a few questions that can shift the dynamics of your relationship with your founders and help you assume more of a coaching stance versus an advisor stance. These specific questions have been modified to suit the VC/founder context and are good questions to keep close at hand when you want to learn more about what you’re hearing:
- What is it that you are trying to achieve?
- What is most important about achieving that? What becomes possible? And what is most important about that becoming possible?
- If you have not achieved it yet, what is stopping you?
- What would you have to give up to make it possible? What is the tough decision you would need to make?
- How can I support you?
7. Don’t discount your experience and network or give it too much credit. Founders generally raise capital from you for reasons beyond just your money: who you are in the world (your experience) and who you know in the world (your network). You can help your founders, but it’s best to ensure your help is requested. If you pound them with what you know and who you know in the absence of the request, it can feel less than helpful.
8. Learn to regulate your fear. When fear hits, the first impulse is self-preservation — this is true for all humans. When fear takes over, it’s best to remember your purpose and responsibilities as a leader and a board member. Failing to self-soothe can create behaviors not in the stakeholders’ best interest. For more on this, read our post New Venture Partner? Wisdom on Navigating Your Role.
For more podcast content on how to be a good board member, check out our episodes on boards here.
To learn more about the struggles between CEOs and their VCs, check out these posts:
