Startup as Orchestra. CEO as Conductor.

Startup as an Orchestra

Let’s start with the bloody obvious … startups are hard, and messy, and risky … and many times a cacophony of discordant noises..

So, as CEO, don’t make it harder than it already is.


Sit down, I’ll explain.

The great majority of startup founders are techies – no DIRECT sales experience, or finance, or HR, or, or, or. In fact, most founders are deep in a single domain or function, and – if somewhat rounded – will be familiar with the other, either as collateral osmosis, or from the oracle that is Google.

And, because as a founder you are hard core type-A, you’ll likely want to deep dive into sales (if you’re a techie) or development (if you’re not a techie).


Let me explain that … DON’T.

Whether you are the CEO of a F-10 company, or of a pre-revenue startup, think of yourself as the conductor of an orchestra, NOT the lead violinist.

Do you think Leonard Bernstein (he was the conductor of the New York Philharmonic) – a pianist – Googled YouTube for tutorials on how to play the violin? And if you are a developer turned CEO, don’t think you need to learn how to become a violinist. But what you DO need to learn is how to conduct:

  • What are the range of sounds and emotions that a violin can create?
  • How do those sounds “play” with the sounds of the cellos, or the timpani?
  • Can my lead violinist create the full range of his/her instrument?
  • Will the violin section sound as one, or will the third violinist always get late to their score?

Or course it helped that Bernstein was an accomplished pianist, but he became a world-renowned conductor because he knew how to deliver the capabilities and emotions of every instrument in a composer’s creation, to produce a symphony.

I trust the analogy is gob-smackingly obvious.

Founder Friendly Term Sheets: Liquidation & Participating Preferences

Most founders get their experience on term sheets from the deep-end training on their first. And many, perhaps most, get screwed – without even knowing it. Let’s talk return preferences: Liquidation and Participating.

Liquidation Preferences [LP]: a multiple of a VCs investment that will be return to the VC, before anyone else gets anything.

Participating Preferences [PP]: describes how the VC shares in the returns left after they have taken their Liquidation Preferences.

Taking both is generally considered double dipping. Ten years ago, Northern Ireland had some of the most egregious preference terms I’ve seen. Perhaps today its fairer.

Back in the 80’s – that’s as far back as I go on term sheet stuff – the intent of these terms was to give financial preference to the VC when the exit was not big enough to meets the generally accepted IRR that would be needed to satisfy the funding Limited Partners. Somewhere in the late 90’s, it became a means of taking even more from the founders. And while most founders can conceptualize this, and perhaps even consider it as a cost of doing business, there is a better way.

But first, let’s illustrate the depth and nature of the screw, by way of an example, with simple numbers to make the math more accessible,

Take a £500K Series-A investment, at $1.5M pre-money and x3* Liquidation Preferences and full, non-capped Participating. [* I’ve seen an NI term sheet that has x5]

[If you don’t understand that previous sentence, consider yourself the perfect mark for this screw.]

And, again to make the arithmetic easy, Let’s say the exit valuation is £20M.

So, the VC owns 25% of the company post-money … and to keep things simple, there are no further rounds, and hence no dilution.

At exit, WITHOUT LP & PP terms, the VC gets 25% of £20M = £5m … an attractive x10 of their investment.

Now factoring in LP & PP. The VC first gets x3 of their investment = £1.5M, then then 25% of the remaining funds (25% of (£20M – £1.5M) = £4.625M) for a total return of £6.125M. That’s a x12+ return to the VC, and 22.5% better than the £5M.

But that still not the ‘eyes wide open” way to look at this. To get £6.125M return from a £20M exit … without LP & PP, the VC would need 30%+ ownership.  With money-in of £500,000, that equates to a valuation of ~£1.132M or ~25% less than the pre-money valuation of £1.5M you THOUGHT the VC had agreed to. 

What you don’t know really can cost you.

But, a simple change to the LP & PP terms can rectify this.

Liquidation Preferences of x1 the investment amount shall first be returned to the investor, provided that the total amount returned to the investor is less than x7 the investment amount.”

Investor shall have the option of taking their Liquidation Preference, or fully participating according to their share ownership, but not both.

Hunting Unicorns in Northern Ireland

1999 was the year the tide of the bubble ebbed, when people stopped writing and reading fantasy articles about that myth – I happened to be apprenticing in VC in NYC at that time, it was wondrous.

Twenty years later, and the tide is turning on another fantastic beast, the mythical unicorn … an investment that is SO big, it consumes all who chase her … the UNICORN HUNTERS.

And like the best fantasies – Harry Potter, Lord of the Rings, Game of Thrones – without caring to analyze, we are unconsciously attracted some empirical truth that forms the basis of the myth.

And so, it is with unicorn investments. Look at the numbers.

In successful VC funds, only the top 25% return anything like a risk adjusted IRR, and of those, 6% of their investments in portfolio companies contribute 60% of the returns. For the masochists reading this, I have the spreadsheets that model VC fund performance.

For Northern Ireland with a (say) £20M fund, aiming to get in the top 25% of performing venture funds (which AFAIK has NEVER been accomplished) a PRE-REVENUE startup that shows £50M revenue in year six is an NI unicorn.

The ALGEBRA only needs a revenue of £25M, but the ALCHEMY says that NO-ONE ever makes their forecasts – especially at pre-revenue stage, so we discount tit by 50%. And of course, the ART is the ability to spot the unicorn from the Cerberus. And if you want to call that investment that makes the funds a unicorn, that’s OK.

So, for any intrepid unicorn hunter, the target of the hunt (in Northern Ireland) is a pre-revenue company, showing a 100% inflated revenue of £50M in year-6, looking for £250K seed on a pre-money of £750K .

.. and you’ll never bag a unicorn if you don’t get in the hunt.

Value in Investing in an Venture Fund …

Selling is the willing exchange of value

In the product or service space, those have value to a buyer [your customer], and, in return, the value you (the seller) gets is … money.

In the investment space, whether it’s a deposit in a bank, a mutual fund, or …

a direct investment in s startup, or as a Limited Partner investing in a venture fund, the same applies.  You give a startup or venture fund some money, after some time they give you some back. But how much represents value?

Well, for starters, you’d expect returns that are commensurate with the risk you’re taking. For the past 50 years, investing to stocks, through the S&P500, would have returned you 8%. And an investment in a single business, or even a portfolio of ten or twenty companies, is certainly riskier, and deserves much higher returns. Thirty years ago, the target IRR for venture funds was 20%-22%. Today, 12%-15% is a common minimum. But only the top 25% of funds achieve this minimum.

So, when looking at the value you’d get from an investment, in a venture fund, there are only two answers you need: (1) what IRR* will they return, and (2) what do they have that will put them in the top 25% of fund managers?

*And if they answer in multiples, run …. you are dealing with ejits.