After considerable effort and even greater stress, the entrepreneur has successfully prospected for potential investors, thrown her best pitches, negotiated carefully, and closed on a round of venture capital financing. The documents are put away. The entrepreneur is recovering from the late‐night staff party celebrating both solvency and living another day. The check has cleared, the lawyers have been paid, and outstanding payables and back bills have been cleared up, paying off not only impatient creditors, but also the more patient and trusting ones. For the moment, immediate cash flow problems are in the rearview mirror.

Don't get too comfortable. The real work is now just beginning—building the company, as well as keeping the newly won, most important customers, the venture capitalist investors, content.

Now You Answer to a Higher Authority—a Board of Directors

The agreement you've just struck with the venture capitalists generally requires a formal board of directors if the company has not yet established one, or may call for changes in the composition of an already‐existing board. A well‐prepared entrepreneur will likely have a board in place even before the venture capital financing. Such a board often includes the technical founder, the chief executive officer, a director with strong industry experience in the company's major domain, and perhaps an attorney.

Generally the first‐round venture capital investors will want to add at least one and perhaps two new directors of their choice. They will provide directors who can both contribute something new to the development of the company, often including valuable sales and industry contacts, and represent the interests of the venture capital investors. As additional financings are undertaken, the venture capitalists may want additional directors who also represent their interests.

For an early‐stage company, a board of five is about right. Typically two are from management, two represent the venture capitalists, and there's one independent, industry‐expert director. Any larger is likely to make communications and decision‐making more difficult, often winding up with one autocrat dominating decisions rather than the more collaborative board that has been shown to add greater value.

The decisions that go into pulling together the new board can be difficult for the entrepreneur. In the case of companies that already had a functioning board, it is often necessary to move aside existing directors who have been loyal supporters through the first tough days.

If there are too many VCs on the board (or even attending as observers without voting rights), too much of the board meetings will often be taken up with sorting out the considerable venture capitalist egos around the table. The first half‐hour of many meetings can be taken up simply with coordinating the VCs' travel schedules for the next meeting date, despite some really good meeting‐planning software available at little cost. A friendly suggestion: Plan to set the meetings for an entire year well ahead of time, and don't let one VC try to trump another over meeting times and places.

Be Ready to Make Management Changes

An early‐stage company that is undergoing rapid growth, or that aspires to grow revenues by 100% or more per year, evolves through many distinct stages very rapidly. It may evolve in three to five years through all the stages a more normal growth company would experience over 10 to 20 years.

In the more leisurely business development cycle, typical attrition and normal growth‐driven organizational changes resolve many of the personnel—and more personal—issues. The fast‐growing, venture capital–supported company, on the other hand, will be faced with personnel issues requiring more immediate decisions. It's important, therefore, to have employment and severance contracts with key employees that will cover rapid changes in employee responsibilities as well as govern matters of retention or termination.

One early management change the venture capital group is likely to push for immediately following a venture capital financing is the addition of a qualified chief financial officer (CFO). Such a management addition may be absolutely necessary if the financing agreement calls for an official audit. It's nearly impossible to conduct a sound audit without the expertise of a CFO who has been down this road before.

On the other hand, one personnel task where the venture capital‐supported entrepreneur can save time is succession planning. Generally in a VC‐backed company, there is little if any succession planning, as the goal is to exit prior to this becoming an issue. Further, staffing should be lean and the management bench not very deep. Moreover, many VC‐backed companies fail early, so succession planning never comes into play.

Anticipate Complications and Management Challenges

As with most aspects of life, a change in one place often leads to ripples of change elsewhere. The entrepreneur's challenge in managing a rapidly evolving business organization is no different. You need to anticipate and plan for those rippling effects. You won't have the luxury of your own measured learning or of a nurturing employee corporate development program. You will need to get accustomed to perceiving and addressing those rippling effects while learning on‐the‐fly.

Our experience is that it is generally best to have strong, explicit responsibility and process boundaries and that all employees know clearly their roles in the company. Without these boundaries, chaos can quickly result. Early‐stage venture teams are often composed of highly aggressive, entrepreneurial individuals who, left to their own devices, may instinctively attempt to take on responsibilities belonging to other team members. The results are predictable—strife and confusion.

As team leader, the entrepreneur must anticipate such complications and sort out essential readjustments quickly, before the friction leads to organizational fire. The entrepreneur is the fire marshal. The entrepreneur also needs to be vigilant to ebbs and flows of employee motivation and productivity. Some employees may start like a house‐a‐fire but then flame out, while others may start more slowly but then burn brightly at the steady pace the organization needs.

The Critical Search for Talent as the Venture Evolves

An essential ingredient in building the venture toward the hoped‐for wealth‐creating outcome is finding and recruiting the key employees needed as the venture evolves. This isn't easy, but it is vitally important.

Several alternative recruiting methods are possible and should be considered. These include the use of executive search recruiters, assistance from the venture capital investors (remember the importance of not only their know‐how, but also their know‐who), referrals by the board of directors, and running ads on Internet job search sites, which are now numerous and can be effective. Don't sell short the potential walk‐in candidate who seeks you out. That instinctive entrepreneurial bent may prove highly compatible with and valuable in an environment where being a self‐starter is key to success and advancement.

Any of these methods can be effective as long as the entrepreneur, ideally with the advice and consent of the board, venture investors, and existing key employees, has carefully reviewed the requirements of the job, identified the prerequisites that should maximize probability of success, and determined what type of personality would be a fit for the emerging company culture and the entrepreneur's style.

The need for speed and cost efficiency often pushes the entrepreneur to lower cost search methods. For example, after working up and reviewing specifications for the job with the VCs and the board, he may ask the venture capital investors or board members if they know anyone who may be qualified for the particular position. Venture capitalists receive a number of resumes from job‐seekers each week, and on occasion one of these may be a good fit with a portfolio company's needs.

Another potential low‐cost search method is to contact alumni placement offices of leading business schools and universities that maintain lists and information on alumni seeking new challenges to conquer. If you are not yourself an alumna or alumnus of a school that might be a fertile hunting ground (and you may need to be one in order to access the list and/or the placement office's help), the entrepreneur is likely to know one who can secure such access. Still another very low‐cost option to find interested candidates who may meet your needs is the use of LinkedIn. In addition, while we earlier mentioned the electronic job board sites, more traditional newspaper ads, such as those in the Wall Street Journal, while perhaps a longer shot for a good fit, can attract qualified candidates and may work.

Executive Search Consultants: Expensive, But Can Be Worth It

If you've never had experience with a qualified executive search consultant and assume they are simply too expensive, we urge you to keep an open mind. Generally their fee is a substantial portion, usually a third, of the hired executive's first‐year salary. While this approach is admittedly not cheap, the selection of the right new management member can make a critical difference.

Also, a number of major executive search firms are interested these days in working with the venture capital–supported company, as entrepreneurship has become all the rage, and they may be willing to work with you on the cost side. They reason that, for the venture capital–supported company, the probability of at least some degree of success is great enough that eventually, assuming a positive relationship is established, they will realize greater financial returns. Some will even take their fee or a portion of it in company equity.

Use of an executive search firm may be especially worthwhile in the case of finding a new chief executive officer (CEO). CEOs are occasionally replaced, usually with the new one recruited from outside the company. This takes place generally either when the company has outgrown the existing CEO's skill set or when the company is in trouble and/or its growth has slowed.

Achieving the confidence of the board is critical for the founder/CEO. Without this confidence, the entrepreneur is not likely to remain CEO for an extended period. It's important for the CEO and her tenure that the relationship with each board member is one of full disclosure and that board members are consulted for their views on a regular basis regarding key decisions. It's not enough to rely on the work at regular board meetings alone.

Our Batterson Venture Capital firm's experience with a venture called Cleversafe is a wonderful illustration of how worthwhile retention of an executive search consultant can be in finding the right CEO to move the venture forward. We've already told you about this Chicago‐based data storage company's recent sale to IBM for $1.3 billion. An important factor contributing to that home run exit was the retention of a recognized executive search firm, once the commercial potential of the company's disruptive new technology was confirmed through its success with a number of major early‐adopter customers, to find a new CEO to build a more aggressive sales and marketing culture. The search, which was led on the company side by the Cleversafe chairman (who was also a major investor), former Motorola CEO Christopher Galvin, found John Morris, then with Jupiter Networks in Silicon Valley, and brought him to Chicago as CEO.

Morris had earlier been an IBM executive and knew the IBM culture and many of its executives as well. Within about two years, Morris had rapidly expanded Cleversafe sales, leading to its sale to IBM. Importantly, besides knowing the industry well, including IBM, the new CEO had to fit into the Cleversafe culture and also get along with the founder/former CEO and the board of directors, all while building the business for a major successful exit.

Galvin's selection of Morris was not just accidental luck. A few years earlier, Galvin had triggered a similar executive change at Navteq, a Chicago‐based provider of geographic information systems and electronic navigable maps such as automotive navigation systems. Before the Galvin‐driven executive change there, Navteq had been unprofitable. With the right CEO at the helm, Navteq advanced to profitability and shortly after was sold to Nokia for $8.1 billion.

The Board's Role as Guardians of the Venture and the Investors' Money

Recruiting an effective board of directors is as critical as, and sometimes even more important than, selecting key members of the management team. The board is called upon to help provide strategic direction, assist with important external constituencies such as suppliers, bankers, investment bankers, and investors, help ensure effective incentives are in place such as stock options or founder shares, and provide advice and consent on major capital spending and operating issues.

An effective board must receive accurate and timely information in a reporting format that provides the necessary tools to properly direct the business. Management should be certain that the board receives this information several weeks prior to the scheduled board meeting. It's often helpful at board meetings, which may occur from every six weeks to perhaps four times a year, to conduct both a high‐level review of the entire business as well as a deep dive into one or two specific areas at least once a year.

The best boards are generally entrepreneurial in their vision while also serving a more measured trustee function for the other stakeholders. They provide a review and check on the actions of management, which, in pursuit of immediate goals, may not remain sufficiently focused on the real end goals. Such management myopia could otherwise result in their failing to put in place the proper management team or operating structure prior to implementation of aggressive growth plans. The board is also entrusted with proper reporting and auditing of results, which is critical particularly for those companies that subsequently choose to become public entities.

Today, in an age of frequent costly hacking attacks, monitoring the security of a company's information and computer systems has become a major board role as well. While guaranteed prevention of hacking may be impossible, the board must assume this role along with management and address as many vulnerabilities as possible. For those companies that either face an immediate security threat or grow so large that the possibility of attempted hacking is very high, the board will often be tasked with forming a cybersecurity committee of the board and being certain that a chief security officer is part of the management team.

Notwithstanding its frequent focus on governance and risk management issues, a key role of many venture capital–backed company boards is to urge the company to accelerate its efforts. The legendary venture capital investor, Arthur Rock (instrumental in the development of Intel and many other companies), was known at board meetings to say repeatedly, “Move faster, move faster.”

Board Meetings

Generally the board chair doesn't have too much to do at board meetings other than make sure the agenda is followed, sandwiches are ordered and delivered for lunch, and the meeting ends on time so the VCs can catch their flights. Occasionally, though, board meetings can get highly contentious and almost come to blows and/or threaten the stability of the venture capital investment syndicate.

On one of those occasions, when one of the authors (Len) was chairman of Nanophase Technology, one investor accused another investor (who had helped create the company) of providing misleading information on the status of the company's patents, which the accuser regarded as very important to the company's success. Not surprisingly, the accused took strong offense at this personal attack, and the whole sad show was quickly degenerating into chaos. This meeting was more interesting than most! The chairman's job was to derail the brawl and get the contending fighters to go to their respective corners.

While there may be conflicts over issues at the board meetings, rarely do questions come to an actual board vote. If by chance a question does come to a vote, it generally means that the entrepreneur had not worked to build a consensus on that issue prior to the meeting. A vote can only result in embarrassment for the losing side and heartburn for the entrepreneur.

Some of the better meetings we have attended as board members and investors have included strategic direction discussions, sometimes resulting in complete strategic pivots. When the fate of the company may ride on the outcome, board members are fully engaged, usually with substantive contributions. These discussions can also be quite dangerous, if not fatal, to the survival of the company without considerable industry and competitive domain experience around the table.

Bankers and Suppliers: Sources of Lower Cost Funds

Venture capital is expensive capital. The inherent riskiness of venture capital investment demands the opportunity for comparably lucrative returns. Hence, once the company is further along and more established, it's time to find a banker.

What's needed is a deep banking relationship, not just a one‐off lender. High growth requires strong and deep bank lines to see the company through ever growing inventory and receivables expansion. The best bankers thoroughly understand the company, its management, and the industry environment. Rather than panicking and calling the loan if business turns down and difficult, they may work with the company to reschedule payments, and they may also attempt to bring others into the banking syndicate if possible to provide additional credit capacity. They are willing as well to work with the venture capital backers rather than at odds with them.

Major suppliers can also be a source of expansion capital should cash become tight. Relationships with the largest and most important of these suppliers should not be left to the purchasing or operations manager, but instead should receive the time and attention of the entrepreneur.

Following the Money

The venture capitalist doesn't just go away after he has invested in the enterprise. There are, however, varying degrees of involvement depending on the approach and policies of the particular venture capital firm. As a rule, the earlier the stage of the investment (i.e., seed, startup, first‐round investment), the more active the venture capitalist will be in following the company and in its decision making. All venture capital investors, whether on the board or not, will want to be informed promptly of all adverse changes as well as major positive developments when this information is available.

Generally the so‐called “lead investor” (often the one who sets the initial terms and invests more than the others) will be the most active. Other syndicate members will often look to this lead investor for information and judgment regarding the venture's progress or its lack.

Some venture capital firms have many investments and therefore have a limited amount of time available to spend tracking each investment. Others have fewer investments and tend to focus intensively on each. This can be a function of the particular investment strategy of a given firm. Some choose to take a more diversified approach and make a larger number of investments, playing the odds and striving for aggregated results that represent an acceptable IRR or multiple on their money invested. Others have more of a home run approach, investing in fewer companies and spending more time and effort with each company.

From time to time, the workload of a venture capitalist can change abruptly. This may be due to a problem situation arising for one of his portfolio companies or considerable time required in raising a new investment fund. The time and attention available to follow his other portfolio companies will then diminish.

Finally, some investments just don't require much time. They hit their business plan from the get‐go, and so the venture capitalist can spend his time more productively elsewhere. While these bluebirds are welcome, they are also rare.

When Crisis Management Is Required

In the case of seriously distressed situations, the venture capitalist can be expected to take a very active role, particularly if acting as the lead or co‐lead investor. In these cases, the VC will become involved in operating decisions and will likely press for management changes, and those with operating skills may even take an active role in the management of the business, however reluctantly.

As previously discussed, when Control Video got into serious trouble, the major venture capital investors engineered the turnaround, kept funding the company week‐to‐week while the turnaround was in progress, selected a new management team, and then recapitalized the company once it was stable. All this led to the creation of America Online, with its eventual market value of over $350 billion.

A venture capitalist hopefully always adds value, but in some cases can make all the difference.

A major board decision and turning point for the entrepreneur and company is whether the company will remain private or go public and just how it will return a rich reward to its investors. We'll turn our attention to that subject in the next chapter.