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Venture Firms Hard on Even Best Entrepreneurs—Study

Source: Yahoo news

Technology - Reuters

Wed Sep 11, 1:45 PM ET 2003

By Jim Christie

SAN FRANCISCO (Reuters) - While high-tech entrepreneurs often worry about the risk of failure, a new study shows they also need to be concerned about the risk of success -- especially if they are backed by venture capitalists.

Venture firms routinely dump money-losing entrepreneurs, but even founders of successful start-ups are not safe, according to a recent study by Warren Boeker, a University of Washington Business School professor.

Boeker found that 35 percent of founders of successful start-ups lost their jobs within five years of their company's launch after investors decided new management could do even better.

"It's a double-edged sword," Boeker told Reuters on Tuesday. "If you are an entrepreneur and have a great idea, you are going to be able to attract more money easily, but you are probably going to have to give up your control and position."

Boeker tracked 434 entrepreneurs between 1983 and 1999, and found investors often bumped those who did well, assuming they would not be able to shift their companies into higher gear by taking products to market or launching public stock offerings.

"Where venture capitalists have greater ownership, they tend to do this to a greater extent," Boeker said. "They really want to make sure they have what they call 'great people' in place."

"They have experience managing larger businesses, they understand things like marketing and channel distribution and management, and they understand how to deal with the financial community," Boeker said.

VCS CRACK THE WHIP

Founders of venture-backed start-ups often leave much wealthier than when they launched their companies, but forced exits can lead to hard feelings and dashed dreams.

That can't be avoided if start-ups are to survive, said Brown Venture Associates partner Dan Lankford, a venture capitalist and recruiter of CEOs for start-ups.

"If a founder doesn't want to bring in a professional CEO you have to wonder how the company will work out," Lankford said, noting that start-up founders with technology backgrounds often are overwhelmed by general business demands.

Lankford said that savvy start-up founders know when to give up the day-to-day tasks of running a company.

One of the best know examples of that in Silicon Valley was when eBay Inc. founder Pierre Omidyar made way for a new CEO, Meg Whitman, in 1998. Whitman had served as a senior-level executive at toymaker Hasbro Inc. and the Walt Disney Co.

Boeker said he suspects the dot-com bust has driven turnover rates of start-up founders higher because venture firms have gained much greater say over how portfolio companies are managed than a few years ago.

"They're much more vigilant, much more careful, much more focused on oversight," Boeker said.

They're also able to wrangle bigger stakes of start-ups. The median value of a company closing venture funding was $11.1 million in the second quarter, or 57 percent below a record $25.9 million in early 2000, the hey-day of Internet start-ups, according to research firm VentureOne.

Copyright © 2002 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Copyright © 2002 Yahoo! Inc. All rights reserved.

 

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