The Greatest Roadblock to Startup Funding: What Investors Won’t Tell You

In my fifty years of experience working with hundreds of startups, I can safely say there’s one roadblock to startup funding that outweighs all others—and most companies will never know the real reason they did not get funded. So, what is this roadblock, and why is it such a secret?

 

Inexperienced Leadership is a Roadblock to Startup Funding

 

Most venture capitalists have worked with hundreds of companies. Therefore, they have an enormous database of experience to know what qualities lead to success and which lead to failure. Most have gambled on first-time CEOs and discovered that their odds of success are lower than with seasoned CEOs. So, they place a premium on the qualifications of the CEO when deciding to invest in a startup. They know the CEO is the one most responsible for the company’s success, and they expect that the CEO will be their primary interface to the company.  

Because of this, if they have reservations about the CEO’s ability to succeed, they will likely decline to invest.  But, they frequently will not tell the CEO their real reason for not investing and you’re left with this roadblock in startup funding without knowing why. They don’t want to hurt feelings, and they don’t want to burn bridges. After all, if things work out well, they might want to invest later.

 

So instead, you may hear things like:

 

• “Your company doesn’t fit our model.”
• “It’s too early for us.”
• “It doesn’t fit our strategy.”
• “We’d like to take a look at the next round.”
• “We might want to invest later if things work out.”

 

So, the founder never hears the reason he is not getting funded. Because it doesn’t matter how good the idea is if management can’t execute.

 

How the Wrong CEO Can Hurt Your Chances at VC Funding

So, what’s the issue here? What are the VCs looking for? Why would VCs prefer an experienced CEO? Is there a pattern?

My own experience as a VC is a small sample, but it is instructive. I created and managed the 3i Ventures, California, venture capital firm and invested directly in twelve companies. In seven of the twelve, it was necessary to replace the founding CEO.

 

Here are some examples of how the founding CEOs failed:

 

•       Did not keep promises to clean up serious accounting issues
•       Good technical leader but could not create a sales force
•       Unable to adjust strategy to changes in the market; missed all sales forecasts
•       Could not identify an attractive market for the product
•       Unable to build the required organization
•       Unable to translate technology into a marketing plan
•       Extremely strong technician; unable to manage non-technical people

 

To Avoid This Roadblock to Startup Funding, What Can You Do?

The above list begs a question: What is a CEO?  What should a CEO know?  What prior experience should a CEO have? 

At an intuitive level, the answer here is pretty obvious: An experienced CEO is an individual who has spent ten to fifteen years in management positions of increasing responsibility and has mastered the fundamental tasks that top-level managers must perform. (See partial list below.)

A first-time CEO is often a highly trained technical expert whose management experience is limited to technical projects and who may have no understanding of how to be a truly effective CEO. They may not have a first-hand understanding of the many tasks a CEO must perform. Many have never worked in a corporation with a CEO, so they have no role model and don’t know what a CEO should do. This is why choosing the wrong CEO can be the biggest roadblock to startup funding. 

Extremely smart and capable technical experts often think being a CEO is intuitive. If you are smart, you will see what needs to be done and find a way to do it. There certainly have been some successful first-time CEOs of this school. Names like Steve Jobs and Bill Gates come to mind. But how many successful corporations appoint their top technician to the CEO job?

 

What Does a CEO Do?

What does a CEO do?  What’s involved in learning the skills?  Are there shortcuts for learning the skills? Is it necessary to have been a CEO previously to avoid this potential roadblock in startup funding? 

There is a simple logic behind hiring an experienced CEO for a startup. Most capable CEOs spend at least fifteen years of hard work as managers before they reach the top level. Here’s a sample of the skills a CEO must possess:

• Corporate Planning
• Competitive Analysis
• Hiring Personnel
• Supervising Personnel
• Dismissing Personnel
• Team Building
• Complex Problem Solving
• Working with a Board of Directors
• Working with Lawyers
• Financial Analysis
• Negotiating

 

Unfortunately, most technical managers have only a small subset of these skills.

 

Is it Necessary to Have a CEO that Has CEO Experience?

 

It is possible to be skilled in the above tasks without having held the title CEO. One of the most successful startups I have worked with had a CEO who had many years of excellent management experience but not as a CEO. She checked most of the boxes but never held the CEO title, and she did an excellent job as a first-time CEO.

So, what’s a startup to do? What are the options for avoiding this roadblock to startup funding? If your startup does not have an experienced CEO, all is not lost. Here are some strategies to consider:

 

• Find an experienced CEO with whom you can be comfortable.

 

• Work with an experienced advisor who can provide the necessary leadership in the early stages and help you attract an experienced CEO as you get closer to funding.

 

• Ensure you and your other team members get as much mileage as possible from your management experience. Don’t understate it; describe it in detail so investors can decide if you have the skills they want to see.

 

• Get market traction. Suppose you can finish developing your product, deliver it to the market, and get enthusiastic customers. In that case, you may be able to convince investors that you can be another Steve Jobs or Bill Gates.

 

A Caution

Resist the temptation to pack your advisory board with high-powered advisors, thinking they will fill your CEO gap. Investors do not invest in advisers. They invest in full-time employees, especially at the CEO level, because they know their interface with the company will be almost entirely through the CEO.

 

To read more about making your startup fundable, and avoiding other common roadblocks to startup funding, refer to my blog posts on these, and many more, topics.