I recently caught up with a couple of CEOs I know. Both are at companies that are about the same vintage and have spent about the same amount of money over that time. They have different amounts of progress, but both companies are at least somewhat behind the plans that they had pitched to investors when they last raised money.
However, at one company, the Board is very supportive of the business and, although concerned about some of the progress issues, is sticking with the company and working hard to make it successful. At the other company, at least one member of the Board has lost patience and is pushing for an exit at a pace that doesn't feel natural to the CEO. Of course, there are always two sides to each of these stories, and I am just hearing from the CEO in each case.
The CEO of the company under pressure was wondering why their Board member had changed his attitude about the company so quickly. I don't really know, but one issue that most entrepreneurs overlook is internal firm dynamics. It can be hard to tell from the outside, but many times decisions at VC firms are influenced by the status of the particular fund the investment is in, the status of the partner at the firm, and partner-to-partner dynamics.
If a particular fund won't return all of its capital to investors, or the deal in question can't make a big difference one way or the other, the VC firm may be ready to give up on a deal just to free up the partner time. This can happen with an older, small deal in a big fund. The outcome just won't move the needle, and the VC firm is probably focused on newer funds that can generate carried interest income for them.
If a deal has lost its initial sponsor, or a partner at a firm sees some other deal as being the key for his or her ascendancy, it's possible that deals can get ignored by the partner on the Board. Also, if partners are being tough on each other over deals in internal discussion, there may be retaliation where other deals are targeted to get even, rather than to maximize returns.
The fundamental issue is with deals that don't turn out to be as large as first thought. However, these can still make some money for the firm and the entrepreneurs. This kind of deal may not matter in some cases to the VC firm, but will matter a lot to the entrepreneur. This misalignment of interest can cause problems.
What can an entrepreneur do about it? First, do your best to know the people who will be involved in the deal, as well as to know the reputation of the firm. Some people and firms can separate internal dynamics from how they manage deals. Others can't. Second, keep communications open so that if you sense these types of problems coming up, you can try to bring them into the open. Most VCs won't acknowledge internal issues, but may be willing to minimize their time by appointing someone outside their firm to their Board seat. This isn't ideal, but is better than getting pushed prematurely to the exit.
Also, you may be able to use other Board members and investors to keep each other honest. No VC wants to look like the one who is the weak member of the syndicate. Don't let a VC ringleader emerge if you can help it. Instead, keep everyone engaged and have a lot of one on one conversations so that each person has to express their own opinion.
VC deals are like marriages, except that it is even more difficult to get out. So, choose your partners very carefully!