Zero to IPO

with George Northup

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Investors

Common goals and separate responsibilities


Instructor
George Northup

CEO, Startup Whisperer, Lacrosse Coach

Lessons Learned

Founders and VCs have common goals but separate fiduciary responsibilities.

You need to have good personal chemistry with your investors to survive difficult times.

It is easier to save a dollar than raise a dollar. Always be capital efficient.

Transcript

Lesson: Zero to IPO with George Northup

Step #8 Investors: Common goals and separate responsibilities

In terms of working with venture capital firms over the years, I've been working with venture capital firms for 25 years, I think they're an important ingredient and a vital component of the ecosystem of venture-backed companies. Frankly, the technology venture industry could not exist without them.

My view is that they're important contributors. Number one, they bring the money, that's very helpful. But if you pick the right firms and particularly the right partners, I think they can be invaluable to you in terms of advice and guidance and support when you need it.

The other thing I would so though is that I think founders and CEOs need to understand in a mature way that investors and management and the company are coming together for a common purpose. But they have different fiduciary responsibilities. So in some way the management are looking after their own careers and trying to build a company, but fundamentally their careers and their personal net worth. The investors, greatly, are looking after the fiduciary responsibilities for their LPs as well.

And so I think that sometimes I'll see younger entrepreneurs maybe not recognize that there are a lot of common goals here but also separate fiduciary responsibilities. And so over time we see tensions when these things veer off. Particularly you see that when you're talking about exits or raising more money because it effects everybody.

But I think that in general the VCs are an important aspect of Silicon Valley, if not core to it along with the entrepreneurs. And I think that the entrepreneurs really have to learn how to work in this relationship and take the best advice and the support that's out there. I think more importantly is to choose carefully to get a good match for your personality or your culture and your outlook on business to match that with a partner and the firm itself.

In terms of picking the right investor, I think that you should look for a partner in the firm where you feel confident that they understand what you're trying to achieve in your company. I don't know if that has to be because they understand your space, I think that's helpful, but I think that philosophically they understand where you're going.

And I think the other thing you want to think about is the chemistry with that individual. It's almost like a marriage and I think the real test is if the company hits a stressful point in time, how are they going to behave with you and how are they going to react with you. For myself what I would prefer is someone who can help work with me as a partner as we guide through difficult times. I think that's the test.

Over my career I've raised $500 million, and that sounds like a lot of money. However, at the same time, I do want to say that the average cash balance for my companies has been close to zero. And I'm saying that kind of tongue in cheek but the point I'm making is that at various times we had very capital-consumptive companies. It felt like for many years that I would close financing round and start working on the next one.

But I will say particularly for an entrepreneur or CEO, likely, they're always working on one of two things. One is raising money and fighting to grow the company. And so not matter who one talks to in Silicon Valley people are always raising money or they have their eye on it in the future. And some people have said to me, “Does it ever stop?” And the real answer is no because even when we took Online Resources public in 1999, the company did a secondary after that.

I think it's a reality, a fact of life that one way or another one is always going to raise capital. But it goes back to my point about it being much easier to save a dollar as opposed to raise a dollar. I think that's the best way to describe it. It's easier to save a dollar of spending rather than create a revenue dollar thereabouts. And so one of my other comments is just that you always have to be capital efficient in spending and in use of resources and things like that because it's so much energy to raise money.

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