Difference between starting a venture capital firm and managing it

Everyone loves an entrepreneur venture capitalist as they extol the best in human spirit, self-motivation, drive and creating wealth for themselves and others.

In the Gulf, the emphasis is to move away from reliance on hydro- carbon revenue and state spending and to unleashing the capitalist spirit of the private sector, especially of technology entrepreneurship.

Many venture capital companies have been created and financial institutions and private equity lenders are eager to source these new initiatives and support them from early stages to eventually listing them, or bringing in more investors as the business matures.

So with this win-win situation where utopia is guaranteed for all, is there happiness at the end of the rainbow? Unfortunately the fairy tale story can often end up a nightmare dream.

One of the principal causes is that while the original idealist and visionary founders started the process, they sometime fail as businessmen as the company becomes larger and more complex to manage.

Instead of allowing those with business acumen, rather than bright ideas to run the business, the original venture capital owners still want to control the company.

High-tech VC funds

This has happened to some of the more famous high tech venture capital companies, leading to investor revolt at the board level, as the recent Uber Technologies Inc. backer Benchmark Capital filed a lawsuit against the start-up’s founder Travis Kalanick for using allegedly fraudulent means to pack the board with his loyalists.

While the lawsuit is going to be defended by other shareholders, the action by Benchmark Capital has sent a strong signal that Silicon Valley’s so-called founder-friendly era is coming to an end.

It is understandable from a psychological perspective that upon the successful launch of a venture capital company, the original entrepreneurs will want to maintain outsize control and influence over their companies.

However, those that analysed the failure of such start-ups have concluded that this has led founders to take a freewheeling approach to running their companies, loading up on shares for themselves and their friends as these were the ones that gave them most support during the early and difficult start-up phase.

This has led to presiding over many employees and creating a toxic workplace. Kalanick is far from the only founder deemed to have abused investors’ trust in him.

In the 1990s, it wasn’t unusual for venture firms to replace founders as CEOs, usually because the investors believed the company needed a leader with more experience in the wider business world. They were also expected to handle both employees and multi shareholders, which was distracting the founder from focusing on what they know best: bringing new and fresh ideas to the company.

Utopian ideal

No wonder some founders opt out in frustration and wish they can go back to that simple and utopian ideal of managing ideas by themselves or with a group of like-minded dreamers.

The real world brings many to the ground, often brutally, and this is where putting together a balanced board of directors to guide a venture capitalist as well as the hiring of professional managers will go a long way in ensuring original ideas survive and flourish. But greed also plays a factor on why venture capital operates the way it does and tolerates over-privileged CEOs.

This is because so much money flooded into tech start-ups, making it easy for founders of the most promising start-ups to shop around for investors and there were many around. Last year, venture firms raised $41.6 billion, the most since the dotcom era, according to the National Venture Capital Association.

For a long time venture firms were loath to crack down on founders for fear they could go elsewhere for capital. In today’s world where long term survival of companies is becoming just as important as making short term profits, original founders have to be guided that bringing new ideas and managing the business at the same time are recipes for eventual failure.

In the Gulf , there is abundant talent available to ensure that an independent Advisory Board can be set up to steer the company and provide the founders the space and the means to continue being innovative.

___________________
Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.