Dec 102014

Dr. Earl R. Smith II

Once a founder begins to come to terms with what it means to be a CEO, there are choices to be made. The first is, what will be their role in the company as it grows. The answer is not foregone and a real test of the founder’s maturity and willingness to subordinate their ego to the needs of the company.


Several years back I wrote a monthly column for a national sheep magazine. (Yes, there was and still is such a thing!) I dealt with a range of subjects surrounding modern flock management. One of my columns focused on the habit of some shepherds with flocks under five hundred head to make their own hay … instead of buying it at auction. As I remember I termed the practice ‘stump dumb’.

One of my readers had settled down in his easy chair on a winters night to read the column. As he told my editors later, he got so mad at me that he flung the magazine across the room and swore never to read it again.

But something changed his mind. About a month later he was out in the barn getting the equipment ready for the planting, tending and harvesting seasons. He said’ “I stopped dead and looked around at the investment I had tied up in all that equipment … drills, tedders, tractors, bailers, wagons and such … and I said to myself ‘well, I’ll be damned! That Jackass is right. This is stump dumb.’

So, maybe you have read my last column and had a similar reaction. Hopefully you have made the entire journey. I hope so … because, if you haven’t, this column is going to be a hard slog.

Let’s assume that you have recognized the need to be a true CEO in your start-up team. You have decided not to be the chief limiting factor in your companies’ potential for growth. Now what? Well, here is the first ‘what’ that you should consider … and it is a trap that many new CEOs fall into. Should you be the lead business development representative of your company or its lead fundraiser?

Now make me proud and think about this one a bit.

Here is the trap … and I have seen it more times that I can count. The CEO takes on the task of raising venture capital. As the tallest hog at the trough, he siphons off the time and energies of the best and brightest within his team … and the rest are left to actually build the business. This is a recipe for failure … and I have seen many a CEO run down that path until it petered out into oblivion.

The CEO of a start-up should be dedicated to building a customer base for the business … period, paragraph. All of his energies should center around this priority. It is not the technology that is important … it is the fact that there are customers whose checks regularly clear and who are willing to pay for the technology that is important. A viable business is defined by its customers not its venture investors.

“But how are we to grow without getting the financial resources we need?”, comes the clarion cry. Well, and this is going to come as a real shock to some, the ‘need’ for financial resources may be less of a ‘given’ in your case than an indicator that you are neither very good or particularly suited for growing a business from the CEO seat. Additionally, there may be other, much less expensive ways to provide those resources.

Many a large company has been built without venture capital on a happy and expanding customer base … none that I know of have managed the reverse.

Venture capitalists are a lot like bankers. If you have what they want they will find you and break down the doors trying to get at it. If you don’t, you won’t get much beyond a smile and the cup of coffee that came during your presentation. But if you have gathered that I am suggesting that the CEO should not be the lead in seeking venture funding, the question naturally comes “Well, who should lead the charge and what should the value proposition be?” OK, let’s try a little role playing.

You are a partner in Rub-A-Dub Ventures. You have just said goodbye to yet another eager young team of ‘entrepreneurs’ with a PowerPoint presentation, business plan and not a real customer in sight. Your headache had been getting worse as the day wears on. But your next meeting is different. In come a couple of senior executives … happy customers of a company that they want to talk to you about investing in. This company is managed by a team that has not only made them happy … but has made a growing client base happy as well. The CEO of this company is so dedicated to customer satisfaction that he has had to skip this meeting to discuss a new business initiative with a client.

OK Mr. Rub-A-Dub, what do you do? If you have any sense at all, you tell your assistant to cancel your appointments for the rest of the day … you have just found your next deal.

This scenario … in one variation or another … happens all of the time. I know partners in private equity funds that have made fortunes by talking to customers first. Here is their rule … and it should be yours. Smart venture capitalist don’t invest in technologies they invest in teams that can implement their marketing plans. And you can identify such a team by three principal characteristics. First, they have customers rather than markets. Second, they have a run rate rather than a burn rate. And third, the CEO is leading the charge to build the customer base.

© Dr. Earl R. Smith II

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