Venture capitalists and entrepreneurs both agree that it takes a strong management team to successfully build a company. In this economic climate, how can a company strengthen their current management team and help make it more attractive for venture capitalists? What are some of the specific characteristics that venture capitalists seek?
Recognizing it would be near impossible to build an all-inclusive list, I have provided just a handful of traits that commonly link a number of persistent entrepreneurs who have secured funding over the last 12 months. I have also included some thoughts from a couple of other VCs and appreciate their input.
Serial Entrepreneurs with Deep Domain Expertise
It all starts with experienced people. Though it’s hard to find, venture capitalists focus on passionate entrepreneurs that have repeatedly succeeded in providing positive exits for investors. These “serial entrepreneurs” have produced one or several successful exits for investors in their previous positions. Clearly, it isn’t a guarantee that their leadership will guide a company to success, but investors often favor entrepreneurs in this category since they have proven they can execute.
Therefore, many venture firms will look for and favor the “unknown person that has been successful in the past over the big name from the big company,” said Winston Fu, general partner with U.S. Venture Partners.
Fu takes the serial entrepreneur criteria one step further looking for people that have deep domain expertise and likes entrepreneurs that have stuck with their companies for a while rather than “job hoppers.”
Team Dexterity
Harry Weller, partner with New Enterprise Associates (NEA) shared with me recently that he looks for management teams that can be flexible enough to remove top executives from the company if necessary to ensure success. Often, he comes across great management teams that have worked together for such a long period of time and become so close knit that this becomes difficult to do even during challenging times. “I don’t like teams that are baked in ceramic together,” Weller said. “I prefer an A-minus rated team with the ability to evolve rather than an A-plus management team that is unable to make the necessary changes."
As a recent success story, he pointed to a company in the telecom space that scaled back a great management team on their own during the market fallout which helped the company survive the past few years. Now the company is gaining a lot more traction.
Compensation Interests Aligned with the Success of the Business
For many early-stage companies that are rapidly growing, but still burning cash, it is important that the salaries for the executives are reasonable. What I have sometimes seen is executives leave a larger, well-established company for the upside of working with a start-up and they still expect their $200,000 plus salary level will continue. The more successful and true entrepreneurs often take a reduced salary, sometimes a fraction of their market value, and take stock.
“Salaries have come way down. They have to since companies cannot raise money like they used to. Everyone has to work for stock,” added Fu.
Passion to Not Give Up
Unfortunately, I know more than a few entrepreneurs that are in the same phase of their company now as they were 12 months ago. The business is not being developed because the company has been unable to raise capital and the entrepreneurs feel paralyzed. Look around, however, and there are plenty of examples of companies in our market that have been successful without raising a dime from venture capitalists and many of them have already had successful exits. The key is to be creative.
