Tech investing: it's all about the founder

You're not just investing in a company or technology. You're investing in a leader.
Written by Andrew Nusca, Contributor

A curious article in the Wall Street Journal this morning tries to make something out of nothing.

Well, not nothing. But certainly not anything new.

The setting: Silicon Valley venture capitalists Andreessen Horowitz say they prefer startups where founders have controlling stakes, with the logic that a founder with more skin in the game will be more dedicated to developing a great product, instead of sitting back and letting the profits roll in on someone else's watch.

The Journal suggets that such a move goes against the grain of the Valley, where founders traditionally gave up more control to investors in exchange for early funding. The founder gets to strike it rich, and investors get to guide it further into profitability where they, too, will hopefully strike it rich.

The implicit bargain: you invent it, we'll develop it -- which stands in stark contrast to the A-H approach of "you invent it, we'll help you develop it."

Joann Lublin and Spencer Ante report:

For now, venture investors are relatively content with the arrangement, as they've made immense sums along the way. The growing worry is that the setup leaves investors little recourse if a highly empowered CEO goes off track.

The truth is that there's always been this zero-sum dynamic between ownership and leadership, long before the first tech bubble ballooned and burst.

To me, there are three kinds of technology founders:

  • The "true" visionaries who thrive in the "discovery" portion of the business, but fail in the "operations" part that comes afterward;
  • The "adaptive" advisionaries who have the brainpower to develop brilliant technology but also the flexibility and motivation to learn how to lead the company that's created from it;
  • The professionals who may be operations masters but perhaps lack the imagination to build a truly innovative product. (Often found at "me-too" companies.)

The tech landscape is littered with examples of all three: "True visionaries" are the Sergey Brins, Jack Dorseys and Marc Andreessens of the world who repeatedly found new startups but prefer not to run them into maturity; "adaptive visionaries" are the Bill Gateses, Mark Zuckerbergs and Steve Jobs who have the ideas but embrace the challenge of keeping them alive, for better or worse; "professionals" are the many nameless executives who never quite become household names but whose products surround us.

For investors, the challenge is keeping a founder's eye on the prize: maximize profit, through the development of an industry-leading product and company. Things fall apart when a founder stops sharing that goal, instead preferring to invent something else or run for elected office or some other distraction.

Often, an investor will want more control of the company to assure that won't happen. But it could just as well encourage it, by taking away a founder's motivation. And without the founder, you don't have the vision -- which means things could easily fall apart as profit tops product in importance.

It's a balance, which is what makes Andreessen Horowitz's approach interesting. A visionary founder with the desire to bulk up on the nuts and bolts of running an enterprise could be more valuable in the long run. But the ones without that desire -- but with the power to make decisions anyway -- pose a big risk to the investor. A few missteps, and the whole thing can go kaput.

So it's a constant tension: product vs. profit. In the case of Andreessen Horowitz (which invests in a number of enterprise companies including Asana, Box, Fusion IO and SnapLogic), the firm is banking that it's a better strategy to choose startups with founders who plan to stick around and learn how to run a company -- Exhibit A, Facebook's Mark Zuckerberg -- rather than those who plan to leave it to a professional brought in from elsewhere.

If the investor can reel in moonshot ideas that don't have promise without snuffing out the creativity completely, it can keep things on track. But giving founders more financial control in the first place may restrict their ability to do that. So it's betting on the "teach a man to fish" part of the old proverb.

The bottom line is this: whatever the financial arrangement, investors aren't just investing in a company or technology, they're also investing in the person or people behind it. That's how it's always been, and that's how it will continue to be. Their confidence in a given founder will be mirrored in the financial structure.

If there's a budding Larry Ellison toiling away on the next big data technology, investors would be wise to recognize that and push to structure the company's financies accordingly. In the end, we're talking about personalities. It's never wise to standardize an approach for something so varied.

Photo: A young Bill Gates. Would you let this guy make business decisions?

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