Growing Your Business: Learning the hat trick

In my line of work, I fund and help grow companies working with and for many stakeholders — investors, employees (those my fund employs, those employed by the companies I fund), the communities and regions in which my companies are located, fellow board of directors members, and my own fund’s investors and board members. Nothing unusual: Many professionals wear different hats and assume different perspectives. On occasion, however, these perspectives don’t align, and there are real conflicts of interest.

An example: As part of investing in a company, I require representation on the board of directors. In this seat, I bring my role as an investor to the table to honor my commitment to my investors to optimize financial performance of the fund. But I also have to juggle other motives — as a board member, I have a fiduciary responsibility to the company. These two purposes sometimes push me toward different conclusions. There are times when my investor perspective may conclude it’s time to sell a business, whether to realize value or to cut losses, or both. Selling for a great return for all tends not to cause much conflict, other than from stakeholders who want to hold out for more.

Sometimes, however, the investment hasn’t gone well and I may conclude that selling sooner rather than later will preserve more value than waiting. Here’s where my multiple hats can get me into trouble.

Typically, the founder of the business is inclined (often with the support of his board) to continue on in hopes of turning things around. As a member of the board, I might well feel more positively about a strategic decision like this one than I would as a skeptical professional investor. But investors have too often seen this movie before — the entrepreneur continues unfailingly to believe that success is just around the corner.

Entrepreneurs and business owners, too, often find themselves in what I’ll call “perspectival quandaries.”

Here’s an example: An entrepreneur raises an amount of capital from my fund to achieve a certain level of growth over a certain period of time. But while executing the plan, the business owner falls short of revenue and maintains or adds to his expenses.

The result is the company burns through the raised capital sooner than planned and has achieved less than planned. At this point, the entrepreneur is trying to balance his many roles:

• CEO: Repeated failure to deliver on plan is rarely a confidence-builder for investors and directors. So the non-performing entrepreneur may be concerned about his job and the jobs of his team and employees.

• Key shareholder: Whether a founder’s stake came from capital provided by that founder or with the support of family and friends, the individual looks at his stake in much the same way as outside investors do — is it appreciating or depreciating? What’s it going to take to retain and add value?

• Co-worker caretaker: Apart from a founder/CEO’s job and investment stake, he often feels an obligation to those employees who have signed on, often at lower-than-market wages, to help realize the dream.

• Director: Like the investor, founder/CEOs of venture-backed companies often secure a seat or two on the board of directors and so juggle the personal vs. professional dilemma when deciding what is in the best interest of investors but not of the company, or vice versa.

Making things clear

With luck, most or all perspectives align, allowing for straightforward decisions. But sometimes entrepreneurs and investors can give greater privilege to one perspective than another. Sometimes they do it knowingly, like when an entrepreneur knows the company is in trouble but fights efforts to make rational decisions, given understandable concerns about his or her ownership stake or that of their friends and family. Investors can seem ruthless about decisions such as these, given concerns about fiduciary obligation to our investors and preserving value for all stakeholders.

This type of conflict can be particularly challenging in that there is no objectively correct answer, just the perspectives of the eternal optimism of an entrepreneur vs. the skepticism of a venture investor.

So, what’s to be done about perspectives? For my part, I spend a lot of time clarifying ours up front, hence the word “clear” in my fund’s moniker, Clear Venture Partners. I try to be as honest and transparent as I can about my expectations, the consequences and the hats that I wear that might cause me to appear to be Jekyll one day and Hyde the next.

I also spend sufficient time with company owners ahead of and throughout the investment relationship to keep communication lines open and above board, which is not to say doing so makes difficult decisions and situations less so.

It simply makes me more certain that I’ve done all I can do to be as open as I can be about my obligations to my many stakeholders.

Michael Gurau, managing general partner of Clear Venture Partners in Portland, Maine, can be reached at mg@clearvcs.com.