Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
As the old saying goes, ‘the road to hell is paved with good intentions’. Angel investors can do far more harm than good by taking the wrong approach to post-funding relationships with the management team.
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In this case, I am talking about early-stage investors and the sins that they sometimes commit when they decide to back a start-up company. I spend a lot of time engaged with such companies – and much of that time is spent working to set right things that were set in place when the first round of angel funding occurred. What follows is a partial list of ‘sins’ and a few suggestions that might both mitigate their impact and improve the investors’ prospects.
CEO Compensation: I regularly come across pre-revenue companies that are paying the CEO at levels that would only be prudent if the company was generating a run-rate in the twenty to thirty million ranges. As a result, lots of the investment capital is going out the door in the form of a fat monthly check. CEO compensation should reflect the condition of the company and the unavoidable fact that, in start-up situations, cash is a very rarest of commodities and needs to be conserved.
Top-Heavy Teams: I was recently asked to look at a company that had a senior team that was appropriate for a much larger company. There was lots of talent available but they were being underutilized. In this case, they had a fully competent director of human resources and an experienced vice president of finance. Both were high quality and very experienced people. However, what the company really needed was a first-class recruiter and a competent bookkeeper. The team has to match the needs and condition of the company.
Compensation Schemes: Quite often, I encounter companies that have base compensation schemes that are not conditional on performance. These schemes act as a disincentive and do not reflect the ‘risk profile’ of the company. A better way forward is to divide senior team base compensation into two categories – one for filling the role and a second that is calculated based on results. A good measure of the prudence of a compensation plan for a start-up is the percentage of investment capital that goes to senior team members no matter what the results are – the smaller this percentage is the better.
Technology Centric Focus: Many angel investors ‘fall in love’ with the technology and ignore the fact that the business of business is just as important as the business of the business. An unavoidable fact about any business is that implementation – not technology – is what makes the difference between success and failure. Certainly, the team needs a strong component of technologists. Implementers – those driven to turn technology into revenues and profits, dominate winning teams.
© Dr. Earl R. Smith II
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Related Articles:
- Red-Teaming: Improve Your Chances of Getting Funded
- Venture Capital – The First Meeting
- Gap Analysis
- Presenting to Early Stage Venture Capitalists: A Few Things to Remember
- Customers as Financiers
- Good Governance – Strategic Positioning for Strategic Planning
- Governance By Visionaries
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