The single most significant reason my firm passes on venture-stage investment opportunities is because of management teams.
I've heard some cleantech investors say things like, "All I care about is the technology; I can replace the team." That may be a valid approach, but it's just not ours. In cleantech, it's as yet unproven that the technology is really the single biggest determining factor of investment success. The innovation may be special today, but with the innovation cycle outpacing the commercialization cycle in many cleantech sectors, quite often today's breakthrough innovation is next year's also-ran. There are a million ways to turn photons into kilowatt-hours, for example, and it's unclear there's one single best way. Furthermore, it seems like the more disruptive the technology and/or business model, the more resistant the market is to adopting it, and also the more capital-intensive it will be to develop it, so the "best" idea often will not win out -- at least within any firm's investment horizon. Plus, if you look at the history of cleantech successes, many of them ended up with a very different technology and/or business model than that which with they started out.
All of which suggests that cleantech investing requires even more emphasis on entrepreneurial talent than perhaps in other sectors, even in an asset category like venture capital where the investors already regularly tell themselves it's "all about the team".
The problem is that management team talent has been, on the whole, thin in the cleantech market. This shouldn't be surprising -- it's a relatively new area for venture-type innovation and entrepreneurs, plus unlike some other sectors like IT, there are fewer large, aggressively innovative incumbent companies that spin out entrepreneurs-in-waiting. So while there certainly is some top-tier entrepreneurial talent in cleantech, more often I run across management teams with promise but lacking in honed entrepreneurial skills.
So when we pass on an investment opportunity because of the management team, it's usually not because we're convinced that that management team can't possibly pull off the challenge in front of them. It's not a vote of "no confidence." Rather, it's usually because we feel like they still have the steep part of their learning curve ahead of them, and we don't have the bandwidth and assurance that we could ourselves drive a top-grading of that management team in a timely fashion. Despite what those other investors may think, upgrading management teams is hard for investors. It's disruptive, distracting, and in some cleantech sectors it can be really hard to find the right candidate with both domain expertise and great entrepreneurial skills. It can take forever, and delays can be fatal. Plus, the more unique the innovation is, the harder it is to find a new CEO who's the right fit, since by definition you're looking at a smaller pool of available, knowledgeable managers from established companies.
Again, it's not that we don't believe those management teams can succeed. It's because we place such a high bar on the management teams we partner with, given that we say no to at least 99 out of 100 opportunities.
Our firm is not alone in this. Time and again I've seen cleantech startups that have had trouble raising funding despite having a good idea, and I can tell it's because investors like us have also been intrigued but ultimately have passed because of the team.
So take charge yourself. Entrepreneurs should aggressively upgrade their own teams. The more you can bring in top talent above and around you, the more attractive your company will be to VCs. And, of course, the more likely it is you will succeed with or without VC dollars anyway.
It starts with the CEO spot. Often cleantech startup founding teams will have an "accidental" CEO -- a CEO who was the leader of the team that came up with the innovation, or a CEO picked as the most "business-experienced" of the overall team. But when I describe "top-tier talent," I'm talking about the top 10% of all startup CEOs. Ask yourself: Are you really already in the top 10% of all startup CEOs?
--If you think you are, but you are having trouble raising financing, ask some pointed questions of peers and investors you trust to see if you really are as good as you think you are. Self-awareness is a critical success trait for entrepreneurs, so develop that knowledge. There may be one or two gaps in your skill set that you can fill or supplement elsewhere on the team.
--If you think you have the potential to be a top-tier CEO, and you'll grow into the role, at the very least find a terrific hands-on mentor to accelerate that process. It can be an early angel investor who's had a track record of working with and identifying top-tier talent, or a successful entrepreneur in your city. Court such people and suck their brains dry (give them equity so they're motivated to help in a significant way). And even better, work to find a top-tier CEO you can bring on board that you will work with and learn from. Very rarely are CEOs truly top-tier on their first attempt. You can learn from failure by yourself, or you can bring on someone to make your current startup a success and from whom you will learn how to make your next startup another success with you at the helm.
--If you are self-aware and realize you're not the right CEO for your company over the long haul, start recruiting that CEO today. Make it a part of your day-to-day job to bring on board the CEO you want and with whom you'll want to work. Network around town to find the CEOs who are most respected.
"But wait," you may ask, "Isn't there a chicken-and-egg problem here? I can't bring in that truly great CEO without raising funding, and I can't raise funding without that truly great CEO."
Good point. It's a challenge -- but there are ways around it.
You can identify that CEO and bring them onto your existing board or advisory board. Or you can just have deep enough conversations with them up to a certain point that you can feel confident you can not only bring them on board after funding, but also put investors in touch with them as a CEO-in-waiting. These first two options might be compelling to some investors, since a few may have their own ideas about what CEOs they would want to introduce to the company, whereas others will be comforted by the fact that you've got one already in hand, so you're covering all bases.
Alternatively (and to my mind, preferably), you can think about raising a smaller round of financing than you would like, from angel/seed investors, so that you can hire that CEO, even knowing they'll need to go out there and raise a new round sooner than you would have hoped.
But basically, one way or another, find a way to top-grade your own team as aggressively as possible. If you can do this, it's a sign of strength and confidence and self-awareness on your part, not a sign of weakness. It can make all the difference between success and failure. And I'm not just talking in terms of raising VC dollars.
A few other things to bear in mind:
1. I'm focused on the CEO position in the discussion above because it's the keystone position -- a top-tier CEO can attract other top-tier management team members to the team as well. And it's also the single most important position funders will look at as well. But the same basic logic applies to other senior management roles. Top-grade aggressively for all senior roles.
2. Don't feel like you need to have an entire team of top-tier talent today. You need to have the core of a great team. But the company will evolve, and so will the needs of the team. Plus, it's always better to run lean than to have an overweight salary structure to support. You don't need an excellent and highly paid VP of Sales and Marketing before you have something to sell and market, to give an obvious example. Investors are used to backing teams with major holes in the management force. Just make sure that the team members who are there -- the core of the future team -- are top-notch. And when talking with investors, be clear about what gaps you see in your management team that you'll want their help in filling.
3. Don't think I'm telling you to kick yourself out of your own company! A confident and self-aware founder will know what they're good at and what they're not good at. Several of my portfolio companies have seen founders migrate over time into increasingly specific roles where they continue to shine and be a major force behind the company's success. A good CEO will also be able to recognize this and build these founders into the right roles for success, if the founders are clearly supportive of such plans. Over time, all startups grow from an early amorphous stage where everyone does a little bit of everything, to more organized and better-defined roles for everyone. It's a startup, and the odds are stacked against startups. So everyone needs to be pulling at the oars together, and pulling strong. It should actually therefore be a relief and a joy to find that you get to focus 100% on what critical tasks you're good at and enjoy doing, rather than having to juggle those tasks plus a lot of other tasks that are less comfortable. In other cases, founders know their limitations and phase themselves out altogether. But either way, the more aggressively and early you top-grade your own team, the more you control your own destiny within or beyond your startup.
4. When searching out top talent to add to your team, you don't have to necessarily pick people who are domain experts in what your startup does. Sometimes, that's important. If the CEO is going to be the chief salesperson for the company and the industry is highly skeptical of outsiders, you probably need an industry insider in the role, for example. But very often, the founding team are domain experts, and what's really needed is simply an experienced, successful entrepreneur at the helm to help make sure the challenges of being a startup -- regardless of sector -- are anticipated and managed as effectively as possible. Poach great talent from other industries, in other words!
I believe our sector is emerging from an innovation-driven phase to an execution phase. But that process requires strong execution by strong management teams.