The fate of control

VC Dispatch has some fun with the old quote about The Golden Rule:  he who has the gold makes the rules.  But they also ask: who has the gold?

We’ll second that with our own twist on an old quote:  “The fate of control is that it always seems too little or too much.”  When term sheet negotiations turn to the topic of control, the cliche is that VC firms may ask for too much while entrepreneurs are inclined to offer too little.

Getting this piece right isn’t so much about control as it is about chemistry.  If VC-CEO partnerships are like marriages (as is often said), then the issue of control needs to mirror that of a healthy marriage.  It’s not about 100% control, or even 51% control – it’s about playing to each others’ strengths and making the concessions and adjustments that a given situation demands.  One spouse may be better at particular types of decisions, the other at handling certain types of tasks.  At other times an issue will just be more important to one than the other.  It’s hopefully a long term relationship, and so over time you each learn when to take your shot and when to pass the ball.

From VC Dispatch’s Who Has The Gold To Make The Rule – VC Or Entrepreneur?:

Twitter Inc. as an example of a start-up that has brought in more business acumen to help it craft a business model. Indeed, Twitter co-founder founder Biz Stone said at the conference that the inclusion of more business-minded people was an essential factor in the acceptance of $135 million from investors this year. Twitter’s investors have been careful not to intervene too much, but with that big investment there is now more pressure for the executives to deliver a working business model.

For Jeff Glass, a managing director with Bain Capital Ventures, the debate over power has defined much of his career as he was a business founder and entrepreneur long before joining Bain. And, in wrestling between needing money and wanting control, he said the steps being taken at first meeting shouldn’t be taken lightly.

“A huge part on both ends is just personal chemistry between management and board; board and CEO; investor and management,” said Glass. “But being on this end now, I would advise to spend more time diligencing the VC or PE firm. Everyone’s cash is green until you have a problem.”

Jeff Glass makes a good point above.   Entrepreneurs who are raising growth capital (i.e. bringing on a long term partner) as opposed to selling their businesses (i.e. get the best valuation) should invest a lot of time conducting due diligence on their prospective financial partner.  A credible partner will let you (indeed, encourage you) to talk to as many of their previous entrepreneur partners as you want to get a feel for what they are like to work with.  Entrepreneurs should ask for references from successful investments, unsuccessful investments and current investments.  Ask for the venture firm’s entire list of previous and current investments and randomly call a number of them.  Find some independent sources on your own who weren’t provided as references but know the venture firm.

Picking a financial partner is as important a decision as any an entrepreneur will make in building his or her company.  Most venture firms will have a good “rap”, but it’s absolutely essential to verify that through due diligence:

Establish a solid foundation for the relationship early:  Will you share the same vision?  Agree on ground rules?

Once the honeymoon is over, will you collectively put forth the constant effort required to sustain the relationship?  How will you resolve conflict?  Are communications open and largely free of clashing egos?  Does the quality of the arguments make the outcomes better?  U2 credits their longevity to a “group ego” that “trumps everything else.“

Fred Wilson of Union Square Ventures, in an outstanding post at his blog, describes one key to successful long term relationships: “shtick tolerance“.  You don’t have to accept everything about your partner – outside of integrity/honesty – but you must be able to more or less tune some things out over the long haul.  You’re patient with their shtick because they’re patient with yours.  It’s hard work.