A few months after I founded my first business (there were eight of us), one American said, “Eight? Then you are President and the other seven are Senior Vice-Presidents.” It took me a long time to realize that it was not a joke, and it took me even longer to understand what he actually meant.
In corporations, the business card title is one of success symbols and a source of respect. In the end, it is understandable, because thousands or tens of thousands of employees have to find out who and how important one is. And fair to mention, when someone in a multinational corporation makes it from bottom to a Vice President, he probably needs to prove some abilities. That’s why even in startups, the founders somehow distribute the well-known functions, but the problem is, they often stick to them later on. However, in the startup world it’s different. The CFO can be the Shylock-in-Chief, and the CTO can put a Blessed Bitpushing Guru on the business card, and it does not matter. To a certain size, people just respect personality and professional qualities, charisma, the ability to do their job well, and lead the company so that it grows and thrives. Scientifically it is called leadership skills. Outside of the company it is a bit different. Successful people want to deal with successful people and nobody wants to deal with someone who is the car’s fifth wheel. And the business card title allows the company to visually “enlarge”. If the company has a senior vice president, it sounds like he is presiding some vice-presidents, each of whom leads several senior managers, and so on. The maid can be a Chief Sanitary Officer and, if the company has two drivers, one of them may be VP, Transportation and the other Car Fleet Manager.
And that was what the aforementioned American meant … the “who’s bigger” game. But it’s just a game and otherwise the titles are useless. Sometimes it even hurts. Often, it turns out that the business overcomes the skills of one of the founders and there is the need to hire someone better. Or that the founder at the start of the company took a role that did not fit him completely. But oops, when we’re hiring someone and the title is already taken, what to do? He’s got an ego, too? Then there is only one good solution. Just scratch that title off him without mercy. Nepotism destroys morale and eventually everyone’s just laughing at it. Company’s success is somewhat more important than an individual’s ego. The ego can not buy a house, a car or a yacht in the Pacific, and the kids of a startup founder will not be proud of their father was the senior vice president of a company that went bust. On the other hand, if someone builds a big and successful business from scratch, no one will be interested in what sort of a title he had on his business card. These people often do not have any… it’s enough to put just name and surname.
Been there, done it. I took investors into my company and awarded them with extensive rights without much thinking about it. I trusted their talk about how they had the same interest with me, how they would never block anything, and how it all was a pure formality. Bullshit. Quid pro quo. High valuations mean high risks and more extensive veto rights.
I’ll tell you a couple of stories.
Story 1. Mall.cz. A major global financial crisis occurred in 2008, and moreover, we screwed SAP implementation. The investors said, “Do not expect any more funding from us. You’re on your own.” Well, we would have expected our partners to stay with us in good and bad … but at least, they would not torpedo our efforts to save the business. Us, founders, had to once again bet everything on the company, we pledged our houses … and saved the company. It grew again, yet we still needed more cash. One of our investors was willing to support us again. The second investor, however, said that not only he would not invest any more money (he lost his biggest LP due to the crisis), but that his stake shall not be diluted should anyone else invest! “We have a veto right to any funding, so unless you guys keep our stake at where it is now, we will not give you our consent.” That was obviously unacceptable for our lead investor who said they would rather let us go bankrupt than succumb to such a blackmail.
Story 2. A global startup success story, a company most of you know. At the beginning, they took money from an investor who got a blocking right to everything. Moreover, he always had ill manners. In the board discussions, he would attack the founder with open vulgarisms. There were several exit talks of the company to big multi-billion players. And now imagine a stakeholder who says to the prospective buyers: “Boys, I have the rights to block it all, so you shall give me more money than to the founders, otherwise go home.” No kidding. As a result, no exit discussions ever progressed.
Veto rights are a standard part of most investment contracts. The investor gets the right to veto any important decisions, for example any other funding, M&A, but often also ordinary business decisions such as senior hires and their compensation packages. On the one hand, no problem with that, he has more experience, so can help avoid fatal errors. But there is also the flip-side. To understand the risks, it helps to know, how an ordinary investment manager job actually looks like. In the vast majority of cases such a wealthy-looking guy is not an entrepreneur like you. He often is just a corporate soldier. A person who works for his salary, and, similarly as in a corporation, his main interest is not to make bold decisions, but not to make mistakes. He fears to be fired. And what is the best strategy to not make mistakes? To assume no responsibility, to decide nothing. So, it is quite common for an entrepreneur to send a so-called “consent letter” to hire a super-employee with whom he felt in love. (By the way, just the constant stress to exactly fulfill all your obligations of the hundred-page investment contract … but that’s elaborated on elsewhere). And after a few iterations, a month went by and although the investor (or his legal department) finally releases the written consent, the love is lost and the guy is already employed somewhere else. Or, you arrange to acquire your competitor, agree on everything, pay due diligence process, prepare contracts, etc., the investor will “support you” all the time (“Great idea, we shall formally approve it after everything is ready”), yet when there’s the time, he doesn’t have the balls and you will not get the approval. True story.
One does not read these things in the PR texts about successful investments and it’s easy to listen to the Sirens. They always sing beautifully, wearing golden robes and waving big valuations. However, it is extremely important for you to have investors on your side, your blood, your values, same motivations. They shall be with you in good and bad and have the balls to make courageous decisions. Veto rights in the contract and their potential unscrupulous enforcement are far more important for the future of your company than if the investor has 12% or 18% stake in your company.
Disclaimer: Of course, not all investors are alike. Many are not corporate soldiers, many can assume risks and have genuine interest to help you. And also it would be naive to think someone would bet on you big bucks without any veto rights. The point of this article is, that founders tend to be blindfolded with the valuation… whilst there are much more important things to look for.
Founders often focus their company presentations on product and detailed elaborations on why is their product superior to that of their competitors. However it is not so important to have the best product on the market, what is critical, is the ability to persuade the market to buy it. Sometimes the market falls for the best product, but that’s almost an exception. Otherwise we would not use Microsoft Windows, successor of MS DOS, which was far from being the best product on the market. And McDonald’s products are also far from any culinary experience.
It is therefore quite surprising, that only a small number of company founders can clearly articulate, how they plan to launch their product on the market and sell a reasonable volume of it. Everyone knows that business is – like it or hate it – about making money, and it is not a beauty contest. So the plan must not be focused on how to make the best product, but how to persuade enough customers to spend money on it, and by doing that, how to secure sufficient funding for the company operations (so called “business model”). The model must not be immediately profitable, because short term the funding can be provided by investors, but even they will want a return on their investment eventually and business, that is not sustainable, will hardly find a buyer.
Long ago even door-to-door groceries were profitable. But a lot changed and labor costs are now the most expensive technology of ’em all. 25 years ago the average salary of a coder was $2,000 per month and a big disk storage costed $8,000. Nowadays it is exactly the opposite. The market has divided into B2C, where each product must be sold with minimum portion of labor costs, and B2B, where it still can pay to send a sales person to a client. And even in B2B the lower limit of a contract goes up. A $100,000 contract is no longer attractive if is negotiated over three iterations with complete technical team in Kuala Lumpur. So even B2B delivery is shifting to B2C automated model. Specifically how to get the product on the market with reasonable costs and reasonable margins, is the go-to-market Strategy. It is much more important, than having a product with a few more features over your competitors. It is an art … and even the best product on the market will fail, if the go-to-market strategy is wrong.