In their book, Founder vs Investor: The Honest Truth About Venture Capital From Startup to IPO, Elizabeth Zalman, founder, and Jerry Neumann, investor, reveal the reality of building a successful venture-backed company. Founders and investors are motivated by different things. This misalignment can result in the founder getting fired.
With candid insights from both sides, they expose the pitfalls of the founder-investor relationship that can lead to shattered dreams. The book goes beyond the glossy origin stories to present a realistic view of the dynamics between the founder and the investor.
A Viral Blog Post On Boards Firing CEOs Inspires A Book
Nearly three years ago, Neumann wrote a blog post, “Your Board of Directors is Probably Going to Fire You.” “It shot to the top of Hacker News,” said Zalman. “And it crashed his web server.” The blog post was inspired by a founder he invested in—Zalman—who, in his opinion, was unfairly fired. Founders appreciated the brutal honesty of the post.
The reasons CEOs get fired by their boards include:
- A lack of communication between the CEO and the board results in misunderstandings and misalignment of goals, ultimately causing the board to lose trust in the CEO’s leadership. CEOs must maintain open and transparent communication with the board, informing them about important decisions and updates.
- Poor performance. If companies’ financials are not meeting expectations or the CEO cannot deliver on promises, the board may see this as a reflection of the CEO’s leadership abilities.
- Displaying questionable ethics or values can create a negative company perception and damage its reputation.
The way founder CEOs transition out of that role varies from finding and hiring replacements to being told if they don’t resign, they will be fired to being escorted out of the building by security.
“Why don’t we write a book?” asked Zalman on a call with Neumann. The authors hope the book will help both sides better understand each other so there are fewer founder/investor breakups.
“They [VCs] are on your board for one reason: to monitor their investments so they can do something if things aren’t going how they want,” writes Neumann in his blog post. VCs not on your board are the ones to go to if you need help.
Founders and VCs portrayed in this column are usually early-stage and mostly don’t have this experience, though sometimes they do. In one case, the founder bought back the company’s assets after the VCs ran the company into the ground. Zalman explained that VCs who invest in pre-seed and seed-stage companies are more founder-friendly.
Founded in 2015, Zalman’s company, strongDM, is a SaaS platform that manages and audits access to infrastructure. It raised nearly $80 million from Tiger Global, Sequoia Capital, True Ventures, HearstLab, Bloomberg Beta, Godfrey Sullivan, and GV.
During the Covid-19 pandemic, communication broke down early on, and things were falling through the cracks. Zalman paused product development for a month at a time when the company needed to go go go. “I made a difficult decision that conflicts with traditional VC growth advice,” Zalman said.
Advice From An Ousted Female Founder And An Investor
Neumann founded a company and later became an early-stage investor. When he first met Zalman, he saw the fire in her belly. Neumann believed she had the passion and ability to succeed. He invested twice in her companies.
Getting in the VC door: Zalman believes the founder should be able to network and reach investment decision-makers, or else they shouldn’t be the CEO. That’s their job! Neumann thinks that associates are knowledgeable about the industries the VC firm invests in and can open the doors to decision-makers.
First meetings: Zalman wants the undivided attention of VCs and won’t do a call if, for example, a VC is driving the car. Neumann, on the other hand, is often approached by founders who are not in the industries or stage company he invests in. The first meeting serves as a filter. He may provide helpful advice or a referral even if he is not investing.
Looking the part: So there is no confusion that Zalman is a techie and this isn’t a date, she doesn’t wear makeup and wears glasses, a truck driver hat, and an armpit-stained T-shirt. Neumann recognizes that some men make passes and have biases but believes there are men for whom gender plays no role.
The different roles of investors, board members, and founders: “As investors, you wear multiple hats,” said Neumann at a book launch event. “It’s difficult not to mix this up.” Investor board members’ role is governance. They are about ROI and giving back money to limited partners (LPs). So VC roles don’t get mixed up, founders should go to investors when they need advice, not to board members.
“As the CEO, my job is to execute the company’s vision,” exclaimed Zalman.
Who is in charge: Zalman feels strongly that the board works for her. On the other hand, Neumann thinks it is unreasonable for founders to believe that boards work for them. Boards work for whatever they feel is the best for the company. And founders work for the board.
Buyer beware: Zalman and Neumann specifically wanted Sandy Lerner, cofounder of Cisco, to write the foreward of the book. In 1990, her VC board members fired her. Whether it is Lerner, Zalman, or Steve Jobs, VCs must know they have invested in founders with strong personalities and independent streaks. Rather than going in with the attitude of “we can always fire the founder,” skip the investment opportunity when you don’t think the founder can take the company to the finish line, Neumann points out.
The book has more point/counterpoint discussions that are worth a read.
Who do you believe is in charge when a company takes venture capital?
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