Thursday, December 20, 2007

Investors: friend or necessary evil?

I had a question yesterday that got me thinking - do management and directors view investors as a necessary evil or as helpful?

As I thought through my answer I can see that the question is more complex in the case of a public company vs. a private company, and my opinion is colored by my experience.

For a public company, investors are very helpful when they
- put the time in to really understand your business
- are long in your stock and believe in the strategy
- coach you on what they care about so you can serve them better
- support you when you go out to the shareholders for approval on a transaction or for shareholder votes.

All these activities help you build the company, and help you (the CEO and management) serve the stakeholders: investors, customers and employees.

However, investors are not helpful when they
- don’t put the time in to understand your strategy and why you are taking the actions you are
- churn or short your stock
- try to control the company without working in it (since I believe the CEO is the only person who has all the information needed to integrate good decisions for the company).

At Simplex, and then in follow on at Cadence, I spent a lot of time with the largest institutional shareholders, and while they quizzed me and pushed me hard, a few became friends through the process. And it was clear to me that the majority of the shareholders made the company stronger and were an asset. I would travel to New York and Boston a couple of times a quarter to discuss the company with major shareholders because I valued the interaction both for the investors support of the stock and for our understanding of what their issues and questions are.

(One of the very fun things about FirstRain is that when I turned the strategy to serve the buy-side, some of my previously major shareholders became early, demanding users of the product, coaching us on how to make it better – it’s terrific to work with such smart people is a totally different context.)

For a private company I think the question of whether investors are friend or foe is black and white. Investors need to do heavy lifting to help get the company off the ground, and if they don’t you don’t want them involved. (see my prior post All venture money is not equal). If your investors are your foe it’s even worse – they can take down the company.

My experience has been that investors in my private companies have been incredible assets to the company. They
- push the team really hard to perform, and then continuously raise the bar
- write a check when the company needs one
- listen and give advice when you ask for it
- and most importantly, trust and support the CEO.

In VC backed companies it’s well understood that the #1 job of the directors/investors is the hiring and firing of the CEO, and to provide strong support in between. It's really very simple.

1 comment:

Any Donkey said...

Well done. Thank you.

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