From a venture investor’s diary #5: is there a good doctor around?

• By ssyc1
• February 12, 2025
• No Comments

The alternative title for this post was originally “A portrait of a company with a founder-CEO low in self-awareness and ability to take feedback and with especially aggressive early investors“.

I like this present title though – I’ve often joked seriously with others that I did not become a medical doctor but have instead become a “company doctor”, practising the art and science of “taking a quick pulse” and offering as useful and as concise a dignosis as quickly as possible.  I hope to get that right most of the time – and that skill is indispensable to the venture investor, living in the uncertainty- and risk-filled world of young companies that we do.

I’ve come across many founder-CEOs developing innovative products over the years, but picking up early indications of troubles and acting on them decisively are so crucial.

Here’s 3 examples of one of these founder-CEO’s behaviour:

– (i) Present at the Board meeting 1Q revenue numbers that represent less than 10% of his full-year forecasts, but continue with that forecast without rejigging his business and financial plans and get very upset when someone made that suggestion of the need for that adjustment;

– (ii) Fail to achieve a milestone which was the condition for a tranche 2 of an investor’s investment and decide to put pressure on the investor when she exercised the right to not invest, by complaining to the one of the investor’s largest Limited Partners or LPs, though probably at the inciting of one if not both of the 2 aggressive early investors;

(iii) Threaten to sue the investor for exercising her right to not approve a financing.

Usually there are lots of things these problematic founder-CEOs don’t like, and even when you are taking extra time to add value to them as part of your portfolio management … I always say there is no use to my value-add even if I were Steve Jobs (or insert other names) if people aren’t open to accepting feedback or learning.

So, onto 3 more examples:

(iv) When you the investor bring an excellent CFO to him, he does not recognise excellence and certainly isn’t open to leveraging useful assets let alone appreciate them even when offered to them, but instead sneezes at it with indifference and closed-mindedness.

(v) He is suspicious of the suggestions and value-adding sessions that you’ve spent time preparing for and persuaded the best experts to help with, even when you’ve already backed him with $ and even when you’ve done more than your fair share of showing your goodwill, and in this case a strategic planning session meant to share experience, engage and discuss.

(I do my best to do that whenever needed, and almost always enjoy these discussions, while many companies are appreciative of this exercise and find them immensely useful.  We’ve found that self-awareness, of one’s strengths and one’s weaknesses is one of the most important qualities, not just of good leaders but of good collaborators and partners.).

(vi) It is impossible to find win-wins (let alone expect him to pro-actively grow others): when one of his “young and smart” leaders decided to leave but showed interest in “staying” in a new format of a spin-out but with some fresh funding from you the investor and hence more autonomy for himself, founder-CEO does not support it at all and isn’t interested in engaging a productive discussion.   And this took place 3 years after the initial investment.  The very predictable result?  Failure of new growth or re-growth attempt and young talent left.

(About 6 years later, the company did exactly that and for almost the same price that investor was willing to pay 6 years earlier; except that it was a cofounder who led the spin-out and it was too late in terms of using the spin-out as a way to change the management culture of the “mother company”.)

What later transpired with this company is even more difficult and challenging.  It snowballed into some even more high-level fraud that triggered an SEC investigation and a class action.  There is more I cannot write about for the moment but along the lines of “fraud attracts more fraud”).

Once again: the importance of picking up on early indicators of problems coupled with taking decisive actions.

Unfortunately, this story is all too real, and there are many variations on the same theme; and even serious fraud with its sophisticated cover-ups is not a one-off, with many more that remain undetected and covered up for years.

I do know of one such example where the details are similar – I can only stress how important it is to diagnose correctly, deal with the situation with honesty, integrity and professionalism.  In our case, we did, though many didn’t listen because these founder-CEO especially with one or two aggressive investors in the background doing the inciting and the wrong Board that does not teach accountability, are good at unleashing attacks on others (especially the truth-tellers) as cover-ups and ensuring these cover-ups are sustained for years.

Founders who see early signs of similar traits in their cofounders are also reminded: deal with it, take decisive actions, as early as you can.

We’ve also developed a method in doing in-depth founding team human capital due diligence.  The psychological make-up, character and personal force of the founder really matters, and that is on top of qualities like drive, commitment, deep understanding of a market or a technology, and the ability to see beyond oneself (see #3 of our “great founding teams” post).

Those who find long-term success tend to have an above average quotient of honesty: we tend not to learn fast if we fail to be honest with ourselves.  We value intellectual honesty a lot here.