Every Start-Up is a Soap Opera

When I was a kid, my older sisters would come home from school, turn on the TV, and watch soap operas until dinner. I sat on the floor organizing my baseball cards while they gasped their way through As the World Turns and General Hospital. Now that I’m a venture capitalist working with entrepreneurs, I sometimes feel déjà vu, like I’m watching the soaps all over again.

New companies have plot twists that seem borrowed from The Young and the Restless and larger-than-life characters straight out of Dynasty. Genius entrepreneurs pursuing their impossible dreams against all odds. Shrewd venture capitalists seeking gold and glory. Mad scientists. Wily CEOs. Crafty competitors. Greedy bankers. Tens of millions of dollars at stake. Lives and careers on the line. Surprises at every turn.

Virtually all entrepreneurs I know have told me they could write a book about the trials and travails of their start-ups. They usually think their story is unique. But although no two are exactly the same, they tend to have similar characters, dramatic tensions, and ups and downs in the action. The drama is usually the result of mistakes that entrepreneurs make, often as a result of misunderstanding the behavior pattern of start-ups and VCs. But as Mark Pincus of Zynga put it to me forcefully, “Don’t be a victim. It’s not the VC’s fault. Don’t look at [the drama and conflicts] personally, look at them structurally.” By learning from the mistakes of other entrepreneurs, you can avoid making their mistakes (and make your own new ones instead!)

I’m being a little facetious with the TV analogy, but not completely. In fact, it’s quite useful to think of the start-up as a drama, and the members of the team as characters, so you can quickly recognize important turning points in the plot and, maybe, do something to avert an unhappy ending. So let me outline the three classic story lines that I’ve seen played out again and again in start-ups.

Classic Plot 1: Fall from Grace. At the beginning of this show, the CEO—usually the founding entrepreneur—is seen by one and all as the hero of the company, the visionary leader who holds the future in his hands. The VC firm is delighted to be in business with this innovator and crows to its peers, limited partners, and anyone else who will listen to how brilliant the entrepreneur is and how big an impact the company will make.

Then, little by little, things go wrong. The CEO fails to make good on a promise to the board. He misses numbers, reports unforeseen product delays, and has a hard time recruiting top talent. He makes claims that later turn out to be untrue. Makes a weird strategic move. Goes over budget. Provides unpleasant surprises at board meetings or in Friday afternoon emails (why do CEOs always send bad news on Friday afternoon?). Bit by bit, the board members lose trust and confidence in the CEO. They start to wonder if all the information he provides is accurate. They question him more closely and interrogate members of the executive team to gain additional insight. Ultimately, they attempt to put tighter controls on the CEO, spend time in meetings discussing the company’s strategy without him, and, suddenly, it feels like the board is trying to manage the company.

At the same time, the CEO feels increasingly under fire. He can’t understand why the board, which had told him what a brilliant visionary he was during the honeymoon period, is constantly on his case. The CEO feels they simply don’t understand the difficult industry context and factors that are out of his hands. He begins to suspect that some of the board members have a hidden agenda. They want to rein him in, cut him out, or push him in a direction he doesn’t want to go. In a panic, he follows a familiar pattern of a CEO in trouble: First, he fires his vice president of sales. (“The guy just can’t make the numbers.”) Then he fires his vice president of engineering. (“She just couldn’t ship the software on time.”) Meanwhile, trust erodes on both sides and things begin to fall apart. The CEO and the board stop communicating. The organization becomes dysfunctional. Finally, the CEO is fired, a permanent replacement can’t be found quickly or easily, and the company has to be sold prematurely without realizing its full potential.

Unfortunately, I have lived through that drama quite a few times. The drama is accentuated when the investors themselves have different levels of confidence in the management team. In one of my companies, the largest investor lost faith in the management team and wanted to sell the company. We and the management team wanted to continue to build the business and so undertook a ten-month effort to convince the largest investor to allow us to recapitalize the company and buy them out. The pain and distraction caused the company to miss its numbers for the year and impaired its potential for long-term success. In retrospect, it would have been better if the entrepreneur had never picked that VC as a co-investor or, alternatively, worked harder to ensure alignment of strategy and leadership.

Classic Plot 2: High Noon Shoot-out. In this case, part of the original VC deal is that the company will be run by a professional CEO, approved by the board, and the founder will stay on as a key member of the management team. The founder agrees to this deal in order to secure funding, but never fully buys into the notion that he will need to “let go.” From the day the CEO first arrives at the company, it is obvious the two will never get along. The founder questions the CEO’s every decision. The CEO wants to change all of the founder’s original processes and blames the company’s poor performance on the founder’s original decisions. The two can’t agree on strategy, organization structure, client management, or whom to hire and fire. The founder thinks the CEO is out to wreck the company and will ruin the culture and “soul” he created. The CEO thinks the company can never grow with the founder on the scene looking over his shoulder, looking backward rather than forward.

The board members realize they have to do something, but they’re not sure what. Should they fire the CEO? But then how could they ever hire a new CEO when the story of the founder’s undermining behavior gets out? Force out the founder? But the founder is the one with the original vision and strategy in which they invested, and often holds critical technical knowledge while the product is still in a very early stage of development. Should they bring in another executive from the outside to mediate—perhaps a part-time chairman? Take a more active role in the day-to-day management themselves? At last, they decide to seek counsel from other members of the management team. At a secret meeting, they call in three of the most senior executives, one by one, and ask for their opinions about what to do. One argues for the CEO. One defends the founder. The third thinks that both should be fired and she should take over.

After much agonizing, the board finally decides that the founder has to go and gives the CEO full authority over the company. Six months later, the CEO abruptly quits. Why? He had lost faith in the board and the mutual trust that existed has eroded. If they agonized so long in their decision to back him this time, what will happen when the next major conflict arises?

I lived through a version of this case, too. Believe me, it was no fun. Worst of all, the drama distracted the senior executive team because they felt compelled to watch the palace intrigue rather than execute the business plan.

Classic Plot 3: VC Mutiny. In this scenario, one or two of the venture capitalists that sit on the board become irritated when the company consistently fails to achieve its performance goals. After being disappointed three quarters in a row, they announce they’re going to abandon their investment and leave the board. This forces the other VCs to scramble to find new investors for future rounds of financing in place of the mutineers. The management team has a mild freak-out.

Then, just before the mutinous VCs walk out the door, business picks up. The company exceeds its growth and profit targets for the quarter. The mutineers change their minds. Not only do they stay in, they become much more active and vocal in decision making than they ever had been before. This confuses and disturbs the management team still further. They become resentful and think the board, and this particular VC firm, are unstable and mercurial. Two key executives decide the company is doomed because the board and its relationship with management are tremendously dysfunctional. Those executives leave after getting recruited away to more promising start-ups. Without them, business drops off again. The vocal VCs give up, resurrect their mutiny, write off their investment, and move on to other, more promising start-ups.

You can imagine how distracting these dramas can be in a small, young company. Overcoming technical hurdles, competition, and market uncertainties at start-ups is hard enough. If you have self-inflicted wounds similar to any of these three dramatic plotlines, you are doomed.

Jeffrey Bussgang is a general partner at Flybridge Capital Partners and the author of the new book, Mastering the VC Game (www.jeffbussgang.com).