Venture Capitalists Are Seeking A New Type of Chief Executive
By JANET WHITMAN
DOW JONES NEWSWIRES
Updated February 6, 2002
NEW YORK -- P.T. Barnum types need not apply.
Venture capitalists have changed their minds about the type of person they want running the start-ups in their portfolios. Instead of looking for the savvy promoter who is half evangelist and half salesman, nowadays venture capitalists seek chief executives who can steer their fledgling companies on to a path of profitability -- and to do so without burning through too much cash.
It's been a dramatic shift. "In 1999, even in 2000, it was an issue of marketing and creating the category leader," says Todd Dagres, general partner at Battery Ventures, a Boston venture-capital firm. "There was a healthy amount of hype. It helped with fund-raising, and with the press and analysts, to convince everyone that the company was on the right path."
But those CEOs oftentimes lack the DNA to cut expenses and emphasize profits. Once, executives who held vice president of marketing titles were shoo-ins for the top jobs. With venture funding tight and exit opportunities scare, executives with plenty of operational expertise and heavy backgrounds in finance are more likely to be handed the keys to companies.
"We're certainly seeing situations where the CEO is being pushed out," says Rick Gostyla, a Silicon Valley-based recruiter with executive-search firm Spencer Stuart. "That's a normal part of the venture cycle, but there's more of it now."
Less Patience
Among the most popular hires since the economic downturn have been turnaround CEOs, brought in to revive troubled companies. "There's not a lot of patience for a lack of performance," says Mr. Gostyla. "The marketplace isn't going to be there to support these guys."
Indeed, Mark Jensen, a managing partner at accounting and consulting firm Deloitte & Touche, estimates that about half of venture-backed companies have looked to replace key leadership over the past year, up from about 25% in a more typical year.
In venture firms' favor, there are scads of talented executives from which to choose. "The downturn in the broader economy and the restructuring of early-stage companies has created a large pool of experienced candidates," Jensen says.
Venture-capital firms aren't simply picking new management talent and telling them to sink or swim. On the contrary, more are spending time guiding their investments.
For example, Boston's Summit Partners offers extra support to its portfolio company executives by appointing board members with a long history in running start-ups. "We've always done that, but now we're doing it with more urgency than ever because the wind's in your face instead of at your back," says Bruce Evans, managing partner with Summit. "With young entrepreneurs, it's nice to have more experienced entrepreneurs and managers on board and folks who have gone through the last business cycle."
Spin Takes Back Seat
During the Internet boom, venture capitalists brought in CEOs who created value by managing perception. It was all about the right spin, emphasizing speed to market, then taking the company public or selling it to make a quick buck. But what Mr. Dagres calls the "instant-wine" days are over.
Venture funding has dwindled, merger and acquisition opportunities are spotty, and the window for initial public offerings has slammed shut to most start-ups. That means venture capitalists can no longer do a quick "flip" of their often profitless portfolio companies and reap millions of dollars in returns.
Instead, VCs are finding themselves hanging on to their investments longer. Rather than depending on strategic partners and investors to pump more money into those companies, they must hire CEOs who can bring in cash the old-fashioned way: by finding customers who will pay more than it costs to make the product.
"If there are problems and CEOs are not on top of them, we try to work with them," says John Brooks, co-founder of Prism Venture Partners, a Westwood, Mass., venture-capital firm. "But, in this environment, if it reaches a point where they're not able to meet the challenge, we're much more prone to say, 'Let's make a change now,' as opposed to saying, 'Let's let the cash run out.' "
Letting your cash run out now is almost always fatal for the start-up. There's just simply not a lot of money being put to work by venture capitalists. Indeed, after pouring a record $99.6 billion into 7,094 companies in 2000, venture capitalists have pulled in the reins, investing only $36.5 billion in about 3,928 companies in 2001, according to new data from the National Venture Capital Association, Venture Economics, and PricewaterhouseCoopers.
The tight access to financing has made it more crucial than ever that companies achieve their milestones. But start-ups aren't the only entities at risk. Indeed, venture firms themselves find themselves struggling to maintain the value of their investments.
For instance, if a company falls short of cash and investors in the initial rounds can't pony up more funds, that's an invitation to new investors, an event which potentially washes out the value of the previous rounds.
Write to Janet Whitman at janet.whitman@dowjones.com |
