Hard Truth Behind VCs Taking Over a Company They Invested in: Real Story Debunked!

As venture capitalists, they have played a crucial role in the economy by financing high-growth start-ups. However, what happens behind the curtain? What if they try to take over one company and fire founding CEO too early?
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Image Credit: Mauldin & Jenkins CPAs & Advisors
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What will cause venture capitalists to try to take over a company they invested in? Originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

My wife was working at a start-up about 10 years ago, and the company was doing really, really well. Revenue and customers were growing exponentially.

The CEO was a brilliant and charismatic leader. The management team was strong. It looked like everyone involved was going to win.

Then, for some inexplicable reason, the Board fired the CEO. My wife and I had dinner with the CEO the night after he was fired.

The CEO was in shock and disbelief. He wasn’t given a reason why he was fired. The CEO told us, “The Board just said we want to go in a different direction.”

The pain and hurt was written all over his face. 24 hours earlier, he was leading a hot start-up as CEO, and suddenly he was out in the street.

My wife and I tried our best to console him. Maybe just having someone to talk to helps take the pain away.

Dinner ended, and we said our goodbyes. My wife asked me what I thought happened on the drive home.

I Told My Wife, “The Board Must Have a Good Reason for Firing The CEO, And The Board Must Have a Plan”

I was wrong.

The Board didn’t have a plan: The result was the business failed after the CEO was fired, and the assets were sold for pennies on the dollar.

My wife heard rumors, as the months went by, of a palace coup led by the VP of Engineering. The VP of Engineering allegedly went to the Board and said, “It’s either the CEO or me.”

The Board choose the VP of Engineering, and the company went down the toilet.

My takeaway is this:

A Founding CEO Has Knowledge and Insight That Cannot Be Replicated, Especially Early On. You Have to Let the Horse Run If It Is Running in The Right Direction.

Start-ups are fragile by their very nature. Removing the centerpiece too early can cause catastrophic failure.

That Having Been Said, When Should A CEO Be Fired?

Years ago, I joined a startup as VP/Marketing. The startup had revenue greater than $10M/year and appeared poised for success.

The CEO brought me in to help grow the company to the next level. I spent my first couple months analyzing the company’s business, meeting with other members of the management team, and assessing strengths and weaknesses. I was shocked by what I found.

The company’s revenue was essentially a house of cards, ready to collapse.

The company’s revenue was all Non-Recurring Engineering, or NRE. Customers were using the company’s products for prototyping, but customers had no intention of using the products for production.

There was no way for the company to scale revenue with an NRE business model.

The Company, On Its Current Course, Was Going to Fail

The CEO and I had lunch every Friday. I presented my findings to the CEO with recommendations for how the company could pivot and build a sustainable business.

The CEO was always positive about my recommendations, but would always have a reason for not taking action. I was getting frustrated, but I didn’t want to go around the CEO to the Board.

One day, the CEO called a staff meeting. I think it was the only staff meeting he ever called. He announced he was resigning as CEO.

I was excited and sad at the same time. I was excited because maybe now I would have a chance to become CEO and get my ideas implemented.

The sadness took me by surprise. I liked the CEO. He was a nice guy, but obviously the wrong person for the job. I guess I was sad to see him go.

I Threw My Hat into The Ring to Become CEO

I learned three interesting things during my interviews with the Board for CEO:

  1. The Board fired the CEO
  2. The Board didn’t know the revenue was all NRE
  3. I also learned the Board had been asking the CEO, “When is the Board going to hear from Brett?”

I didn’t get the CEO role. I was disappointed I didn’t get the job, but it was the best thing that could have ever happened.

The new CEO fired me two months later. The company was never able to recover from its NRE direction. I don’t think anyone could have saved the company, including me.

The original CEO should have been terminated for hiding information from the Board. Hiding information goes right against the golden rule of “never surprise your Board.”

Never surprise your manager either, by the way.

What Ever Happened to The CEO of My Wife’s Company?

We stayed close to him. He moved to New York, and he started a new company based on the exact same business model and succeeded. He sold the business about a few years ago, and he did very well on the sale.

Congratulations Sameer, you deserve it!

Contributed by Brett FoxFmr CEO @ Touchstone Semiconductor

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