This topic is certainly top of mind; just last week, I was asked to contribute to a presentation on “What founders hate about VCs and why VCs persist in these behaviours, despite being aware of the friction,” for one of Europe’s largest upcoming conferences in the start-up ecosystem.
As an early-stage investor, my objective is clear: to generate returns for our LPs within a predefined time frame. While the investment thesis and timing of Mubadala Capital differ from those of a fund like Peak, the underlying principle remains consistent. In times of economic uncertainty or company distress, fundamental changes may become necessary to protect the interests of all stakeholders—most notably, for investors, this means safeguarding returns or … losses.
The approach to enforcing such fundamental changes likely varies significantly between early-stage VCs and players like Mubadala Capital. For us, as early-stage investors, the (founding) team is one of the critical ingredients for success. Often, the company essentially is the team—a group of ambitious individuals driven to build something big. Proposing or enforcing fundamental changes, therefore, requires a delicate balance. Pushing too hard may corner the founders or key team members, leading to potentially unfavourable outcomes. On the other hand, hesitation can cause delays, potentially exacerbating runway issues.
To answer the question of when it is appropriate for VCs to make fundamental changes, I would urge other stakeholders to carefully consider what it means to bring an investor on board and understand the investor’s goals and timelines. The fit between VC and founder is often underrated, but it becomes even more crucial when fundamental changes are necessary.
Tycho Klessens
Investor | Peak Capital
– – – – –
As a VC, we have a responsibility towards many stakeholders. LPs (Limited partners) are obviously one of the most important ones and we as money managers have a fiduciary responsibility that’s one of the cornerstone of any partnership. That being said, we also have responsibilities towards other stakeholders like our founders that we’ve backed and the companies we have invested in. In turbulent times, it’s easy to think that making big changes can have a big positive outcome and people can get tempted to roll up their sleeves. In my experience, VCs should rarely go in and make bigger fundamental changes unless you fully understand that it’s in the best interest of the company that you have backed. I think it’s critical to first and foremost think long-term as VCs live and die by their reputation. The second part as a minority shareholder is to understand your role as an investor in companies. You’re there to support and help management navigate with your experience and slightly different vantage point.
Does that mean that VCs should never get involved with more fundamental changes? In my opinion, no. There are certainly situations when VCs should act more resolute and get more involved. Here are a few examples: we’ve had to go in and had tough conversations with management or the CEO that we do not have enough confidence in them building the best company out there. However, let’s say switching a CEO is not one minority investors’ decision, but rather a board decision so any VC will have to navigate this topic with the board of directors.
Another area where VCs/investors can help their companies, again through the board, is to push for an earlier exit or merger due to changes in the market. It’s not uncommon that VCs get information that be beneficial for companies to know about regarding strategic shifts in a market (new entrants, tougher competition) that companies can use to their benefit and make adjustment accordingly.
However, it’s quite rare that any investor can drive any ruthless fundamental change in companies without coming back to haunt them down the line. In my experience, when this happens that fund is typically being to short-term focused and in many cases will not be able to raise their next fund.
Linus Dahg
Managing Partner | in|venture
– – – – –
During the momentum cycle from 2020 to 2022, significant capital flowed into the technology sector. Many venture capital (VC)-backed companies raised more money than they needed, often at very high valuations. These valuations were a characteristic of both public and private markets during that time. However, the outcomes required to generate attractive returns on these large financing rounds were substantial. When the market corrected sharply as a result of rising interest rates, these ambitious expectations became difficult to achieve.
Now, two years later, companies that raised excessive funds often at high valuations and failed to meet the very ambitious goals set during the 2020-2022 period are facing the consequences. This includes management shakeups, restructuring efforts, and difficult conversations with shareholders.
This is often when investors step in to make management changes. It’s important to note that VCs and private equity firms typically approach these situations differently. VCs generally support founders for the long term, while private equity investors tend to initiate changes earlier in the process. In navigating these challenging situations, independent directors can play a crucial role as neutral voices, ensuring that decisions are made for the right reasons.
At the end of the day, the lesson is simple: Entrepreneurs should raise the right amount of capital for their plans and aim for valuations that make sense for both the company and its investors.
With the AI hype cycle now in full swing, this advice is more relevant than ever. Entrepreneurs should avoid getting swept up in the excitement and resist taking on more capital than they can effectively deploy.
Hillel Zidel
Managing Director | Kennet
– – – – –
Many of these behaviours are the result of the frothy investments done at the peak of the VC market in 2021. In venture you fail fast and succeed slow, and you have to live with the consequences of your decisions. We believe that founder-driven companies can significantly outperform companies with external management, but also recognise that visionary early stage founders are not always the best at scaling a business operationally. Working closely with founders as they navigate the challenges of growth and revenues volatility is at the core of being a great VC. Not all founders seek out honest feedback, and few are then prepared to listen and act on it, or analytically push back. This is where VC differs dramatically from PE: our job is to find and back founders that can act on objective feedback, and then go all in. If we make a mistake in assessing the coachability of a founder, then we must navigate the consequences with them.
Irena Spazzapan
Managing General Partner | Systemiq Capital
