Be Wary of Venture Capital

The Culture Chronicles

October / November 07 By: Paul Short Volume 5 Number 5

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A few months ago I sat through a dozen presentations made by startups trying to raise venture capital. It was eight years ago that I successfully raised millions of dollars. Before getting involved with VCs, I ran a successful technology services company. The primary reason my partner and I founded it was to create a culture that was the antithesis of the big company bureaucracy from which we came. The business model was secondary. We worked hard to make it a place where employees had input into the company, where it was fun, where everyone acted and treated others as adults. It was, then, an inward-looking company, focused on our culture. We were like family.

We were reasonably successful, profitable and making a decent living, but we saw the writing on the wall. The market was changing and our type of company was going to get squeezed. So we put together a plan and raised that VC money to transform us from a service business to a product business instead.

The radical nature of the changes took me by surprise. The engineering was largely the same so we thought it would be a smooth transition, but that was a sadly mistaken notion. In fact, the change was so dramatic that I now view it as a new company, my second startup.

Outside money was the lever that drove the change. VCs have a clear agenda: to sell the stock they bought for a large profit, and the sooner the better. Don't get me wrong, that's right and proper for a VC to do. That's the business they are in, but the impact of culture was jarring. The old inward-focused culture would no longer work. We had to change.

Frankly, I did a lousy job creating that change. In a family-like culture you don't fire your brother until you've worked hard to give him every chance to be successful. You don't drive people to work 80 hours per week because you want them to be balanced and happy both in and out of work. In the VC-backed company I needed to concentrate on generating shareholder value, not being a family. Not that I should have whipped employees mercilessly, but how we worked together had to be different. I moved slowly. Too slowly.

Now I'm out raising money for my new startup and I'm stewing about culture. There are only two of us now, both founders, but we'll need to hire a boatload of employees soon. For all the articles I've written and speeches I've given, now it's my turn to design the culture, and I'm torn. On the one hand, I liked working at my old company. I loved the family atmosphere; it was fun and as low stress as running a company can be. On the other, it wasn't as successful as it needed to be. There are complex reasons, but the culture was part of that lack.
Culture starts with purpose. This startup's purpose is to hit a home run: to start a company that will eventually go public and generate a billion dollars in revenue. That's the right reason to raise venture dollars.

So the foundation of new culture is clear: it's all about execution. I will be much less tolerant of people not doing their jobs well. When I find that I've put someone in the wrong position, I'll pull the trigger more quickly and get them out of there. I'll expect more confrontation between each and every person, but will not tolerate confrontation for its own sake. Picnics and parties will be much less important.

That doesn't mean the company will look like that big company from which I came—€”far from it. But it will be an outward-focused culture instead of an inward-focused culture. I will still expect people to act as adults and will treat them as such. It will still be accessible and open-door.

I will still have fun, because otherwise what's the point? But the fun here will be like the six-mile swim I just completed. Thought it was difficult and arduous, it was fun because I accomplished a big, hairy, audacious goal. That in a nutshell is my new startup: a big, hairy, audacious goal.

The moral of this personal story is this: Think hard before you raise venture capital. Consider first why you've started the company. Are you, like I was years ago, trying to get away from big company bureaucracy? If so, you'd better think hard about the culture you want and make sure it's aligned with your investors. Are you trying to get rich? That's what VCs want to hear. Raising venture capital makes your priority creating shareholder value. Everything else takes a back seat.

Paul Short is CEO of Quadric, Inc., and runs the web site www.culturechronicles.com.