Guide to Startup CEOs
April 17, 2017
“Yes Minister” was a highly popular series in the eighties aired on BBC that depicted a peculiar relationship between the elected members and the bureaucracy. Much of the show's humour was derived from the antagonism between cabinet ministers (who believe they are in charge) and the members of the British Civil Service (who believe they really run the country).
A very similar situation is visible globally with funded startups between their founding CEOs and their mega investors. The irony of the situation is that the same investors poured money on the vision and capability of that CEO & team.
The fundamental difference between a CEO of a listed company and a private company which is significantly funded is the elbow room a CEO gets in running the company. Large base of shareholding in a listed company allows CEOs some breathing space to experiment and fail. There can be a severe shareholder activism but not at the cost of suffocating the CEO from decision making. Eventually the CEO may be asked to go by the board under the pressure of aggrieved shareholders, but that is an extreme case when stock price sees no recovery in the light of multiple bad decisions.
However, the situation that is appearing globally in well funded closely held companies is slightly different. The room to make mistakes for a CEO is shrinking. Mistake of a CEO is only measured from the prism of an exit event for existing investors. Every action of CEO is substantially measured with respect to how it impacts the exit of its investors and obviously the returns from that exit.
In earlier days of investment, mistakes are termed as “trying to create disruption in the market” but as the honeymoon period fades away and pressure for exits loom, mistakes are only mistakes, they no longer remain game changing risk taking experiments.
The contrast is clearly seen across segments. The CEO of third largest em in India was talking about an IPO of its company and at the same time, its largest investor was negotiating a sale deal with its competitor! The investors of world’s largest cab aggregating company decided that it will merge with its competitor in China and the CEO was asked to act on it.
Whatever be the under currents, considerations etc, the investors with all their veto powers and water tight legal agreements had the final say!
Someone asked me at a startup event, “is it ok for CEO Founders to fall below 51%?”, I smiled and replied, “whether the percentage holding is good or bad depends on how you are able to navigate yourself as a founder CEO between the veto, rights, liquidation preferences, indemnity clauses and exit rights mentioned in the shareholder agreement.”
India is a tough market to do any business and when deals are done on aggressive business plans and fairytale valuations, such situations are bound to arise; specially when the targets are not met. Targets and valuation are two sides of the same coin.
I thus believe that there are couple of areas if watched for, the CEOs may not have a face off with its investors as we are witnessing today. There can be many more points but I have listed few which I personally think are critical.
Once of the biggest virtues a startup founder CEO should not let go is atmost humility at all times. If PR, publicity or funding amount shakes the humility of the CEO, he may not have a smooth ride after that. Remain humble.
b) Funding for the plan, not plan for funding
The founder CEOs need to find capital to fund their plan; not prepare a plan that gets funded. First you need to believe in your idea and the business model; then find the investor who buys into it. Don’t make multiple plans for multiple investors.
c) Set and project realistic targets
Don’t chase valuation beyond reasoning. This leads to projecting of numbers which are humanly impossible many a times. This is a sure shot recipe for inviting board level conflicts going forward. Don’t get shortchanged on valuation either! Learn to maintain a balance.
d) Eyes always on execution
Irrespective of the balance of capital available in your bank, don’t get your eyes off the on ground execution. In a tough market like India, CEOs need to be a part of the execution substantially and can’t assume blue skying strategy role only. The CEOs need to develop the mental bandwidth to move between strategy and execution quickly.
e) Cashflows and profitability targets
Cashflows and profitability is back in fashion again. Suddenly after years of chasing vanity matrices and blowing away millions, some CEOs are realizing that they chased wrong matrices. Focusing on the same from very beginning might help substantially.
f) Don’t do too many things
Money in the bank makes you feel invincible. CEOs start to think about forward and backward integration. Every business across the so called “value chain” appears lucrative. Expansion becomes a self fulfilling prophecy. Avoid the temptation. Stick to the core and take strategic growth decisions very carefully, not impulsively.
g) Match the vision period with the life of the fund investing
It may sound amusing but it is very important for the founder CEO to state realistic number of years for his/her vision to be realized and ensure that the investors investing into that vision have the same time period. Irrespective of hundreds of high profile medical advances that have taken place globally, a baby is born only after nine months!
It is thus important for founding CEO of a startup to think multi dimensional. The issues that he or she confronts today are very complex.
At the same time, the CEO should also ensure that there is meeting of minds with the investors throughout the journey and not only at the time of infusion of capital.
As many more exit clauses get triggered this year, we will get to see two type of CEOs – one who will drive the decision making, and one who will say “Yes sir”!