All I Know About VC, I Learned from My Kids

"You are only as happy as your worst off kid"
   — Parenting Proverb

One day, I was going through a bipolar moment. One of our companies was about to sell for a nice multiple on invested capital. However, later that day, another company informed us that it had lost two major customers and was in a severe liquidity squeeze. Since your attention always goes to the fire drill of the day, I jumped into crisis mode on company B while much of the euphoria from company A receded. Ironically, later that day, I was talking with a friend about children. He mentioned the quote above. You’ll often find yourself, as a parent, happy that one of your children finally mastered a hard task but find yourself stressed because another is struggling due to health, friends, academics or the like.

I began to think about the children/portfolio analogy and realized that there were a lot of other common lessons. Most of these relate to how you interact or manage the deal. One of the most difficult tendencies to avoid as a venture capital is to jump to deeply into the day to day operations of an entrepreneur’s business. VC’s have to walk the fine line between being helpful and being meddlesome. Many of these lessons also apply to CEO’s and how they manage their lieutenants.

They have to own the concept & responsibility: VC’s come up with all sorts of brilliant ideas on how a business should be run. Some are insightful and come from years of going through similar situations in the past. Some are simply seagull droppings deposited from 20,000 feet up. Since VC’s have leverage due to their capital and their board role, there is a tendency, at times, to try and push through an idea even if the team or CEO doesn’t agree or track on it. This usually does not end well.

Just like with my kids, if they don’t buy into the idea, they won’t take ownership of it, they won’t internalize the need and it will get done half-assed as best simply to get you off their back. Furthermore, they (kids or management) often have a better read on what the daily constraints will or won’t allow and how it fits into the bigger picture. As a result, I have found it best to explain my point of view, give my reasoning, establish boundaries (see next) and let the company do what it thinks is best.

Set Boundaries, Principles & Consequences: Kids only truly learn to take responsibility, become autonomous and take ownership when they accomplish it themselves. While CEO’s should have the freedom to run their businesses, they also have to be respectful of the "law of gravity". VC’s have a pretty good experience base to draw from regarding "things that go boom". However, they should avoid micro-manage the team. VC’s should establish, along with management, boundaries (revenue targets, cash runway, number of customers, etc), establish principles (minimize dilution, deal openly & honestly with the board, etc) and let the company execute as it deems best. The consequences for success or failure are usually pretty straight forward. This approach sets direction and expectations but allows for the CEO to take ownership and responsibility.

Let Them Fail: Parents hate to see their kids suffer. There is also an "ego boundary" expansion where the child’s success or failure is the parent’s also. VC’s have the same issue. If the VC has effectively set boundaries, then there should room for the company to make mistakes and fail from time to time without taking the business down. Failure is a key way for CEO’s to fully appreciate the different facets of "the law of gravity". As the Irish say, what doesn’t kill you, makes you stronger. On the other hand, I have often found that they were right all along and pulled things off.

Offer Help & Resources: Offer but don’t insist on resources. Only they know what they truly need to accomplish a task. Additionally, if they don’t appreciate or understand why a resource is useful, they won’t be able to take full advantage of it. Often VC’s will say "you need to talk with xyz, VP of Biz Dev at Acme Inc". The VC will think that this is a key introduction, but the CEO will see it as a tangential effort and only take the meeting to please the VC (e.g. wasted time). This is like demanding that a kids see a tutor or other resource. Sometimes you have to, but you’ll get your best results if they see how it fits into the big picture and why it is useful.

Let Them Come Up with Solutions: VC’s should help define the problem or challenge but then ask the Company to come up with solutions or ideas. VC’s had trouble resisting throwing in their opinion and recommended course of action. This skews the process and often ends up with a solution the CEO only half supports. With my kids, I have been amazed by how creative they are when given the task of solving for themselves. Often the solution is much better than I would have ever come up with.

3 to1 Praise/Criticism: I can’t recall if the ratio is 5:1 or 3:1, but I do remember the childhood development folks talking about the importance of giving multiple genuine praises for every criticism. Humans feel lose or criticism significantly more than praise (lot of stock market psychology tests have demonstrated the lose aversion theory). VC’s are a nervous bunch and can be quick to point out all that either is going wrong or could go wrong. It is essential to keep things in perspective and to remain supportive of the company. It is grueling out in the battlefield and the last thing a CEO needs is the "nagging" VC at home. This doesn’t mean that it should be a Barney love fest, but VC’s should attempt to infuse positive energy into their companies. Look for small successes, not just misses or risks.

Sparse Use of the Nuclear Button: Every parent finds that moment when frustration is so high that he/she feels the coronary coming on. Often this results, when the child has defiantly refused to do something, in the parent raising his/her voice and relying on the cliche "Because I Said So". When a parent begins to yell or threaten extreme consequences, it gets the child’s attention. It also becomes less effect with each use and shuts down the communication channel and insures that the child will not internalize any of the discussion or reasoning. With a CEO, sometimes a VC will need to bring out the stick. However, once this happens, trust will begin to breakdown and information flows will likely get filtered. If this happens repeatedly, either the CEO will eventually go or the company will be sold.

Don’t Make It Personal: Stay calm and try to keep emotions out of it. When my daughter was young and rammed her head into table, she was fine until I looked at the huge, purple bump forming and panicked.  She then proceeded to burst into hysterical tears. If dad can’t deal with this, why should she? While a VC might fear that the ship is going down, he/she should lay out the facts, defining the consequences and jointly laying out an action plan versus bemoaning the despair. The board’s attitude towards these situations will heavily influence how the CEO approaches and behaves.

While these sounds straight forward, they are very hard to comply with due to human nature. I would give myself between a C+ and an A- on these at different investments. My goal, overtime, is to move more consistently upward. That said, I won’t survey the kids…