Leadership

Activist Investors, Venture Capitalists and Other Gamblers

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When a garden-variety venture capitalist says “I’ll gamble on your startup,” he means it quite literally. 

People with money to invest are either builders or gamblers. Most investors – ranging from you with your conservative 401(k) holdings, to Warren Buffet – like to invest in solid companies with good leadership, great cultures and clear market visions. These are entrepreneurial investors, ones who contribute to the creation and expansion of enduring companies and global brands. 

But off in the corner slake the gamblers. VCs and activist investors who care little or nothing about world-altering enterprises and crafting corporate cultures that sustain both profits and people. Instead, their focus is on quick profit – share price bumps, irrational valuations and selling off their portfolios to the highest bidder. 

The long and the short of it 

What divides these camps is their long- and short-term vision. Most entrepreneurs have long-term goals. They want not only to bring their genius and inventiveness to market but also want to create enduring enterprises that consistently deliver value to customers and employees alike. Bill and Dave created Hewlett-Packard in that mold and, by all employee and customer accounts, that once-enduring enterprise was the envy of any entrepreneur. 

But Bill and Dave would not recognize today’s HP. Activists invaded HP’s board of directors, purged it of its lineage and changed its focus from invention and quality to one of growth at any cost … and the cost has been very high. By shifting away from HP’s traditional long-term view of business, people and customers, HP is enduring voluntary dismemberments and gut-wrenching market turmoil. 

This division between short- and long-term thinking is a topic that founders need to give considerable thought to. Google likely had many chances, and likely encountered a lot of pressure to sell out early on. In the era when WebCrawler (remember them?) was the best available search engine, Google could have been auctioned off to the likes of AOL or Yahoo. But Google’s founders had long-term visions for their company, including how to care for employees and customers. Investors voting to sell off Google in its early days would have had a nice year-end profit but would have missed out on a lifetime of excitement and extreme returns on their investments. 

Gamblers, not-so-anonymous 

Many venture capitalists are gamblers. This is not to say all VCs are bad, but some are not very good, as evidenced by their staggering poor win/loss rates and generally lackluster profitability. 

Gambler VCs are fairly easy to spot. They talk about equity control and exit strategies early on. A friend of mine once encountered a VC that confronted a founder resistant to giving up majority equity of his company by saying, “Do you want to be rich, or do you want to be king?” Ignoring for the moment that being king is the best way to get rich, the real questions the founder should have asked were if this VC had a track record for making people rich and if part of getting rich required selling out. 

In Silicon Valley, the typical answers are no and yes, which says everything about the dysfunction of our local venture industry. This underpinning of the high-tech industry is composed of organizations with poor wealth-making histories, and they achieve these petty results by prioritizing short-term exit strategy investments. That these two elements are mutually reinforcing is something I discuss at length in my book, “Tough Things First.” The gist of the problem is that by focusing on raising rounds and spurring only rapid top-line growth, real companies with real cultures and vivid missions are never created and thus can never last or achieve. 

At the other end of the corporate life cycle are similar creatures called activist investors. Like the bad kind of VC, activist investors seek only short-term returns, not enduring ones. Like VC gamblers, they toss their wager onto the table in terms of acquiring a large stake in a company. They then work to break the company apart or sell it off whole, often for the sake of meager, one-time returns. Enduring companies with enduring profitability are of little interest to them. 

Nor are people. Though exaggerated in the case of activist investors, both they and short-sighted VCs ignore the plight of employees – people who worked long hours, endured terrible commutes, and sacrificed to help create the companies that are scuppered. These are real people with real families, dreams, hopes and lives. Investors that focus on their personal short-term profits while ignoring the long-term human costs of their decisions share the gambling addict’s sociopathy. 

The entrepreneurial non-gambler 

Gamblers are only controlled when there isn’t a game to play. 

The recent acquisition of EMC brought Michael Dell’s delight in running a private company to the public. Unburdened by the pressure of turning short-term profits, Dell is focusing on how to restructure his company to dominate enduring growth markets. By not associating with gamblers, Dell and other entrepreneurs have the luxury of focusing on their vision and creating companies that reach those goals. 

This is the critical decision new entrepreneurs – especially those in Silicon Valley, surrounded by gamblers of all varieties – must make. Are you building an enduring enterprise, one that delivers profits, delights customers and creates a culture that people want to join? Or are you spending your time perpetually chasing your next funding round, only to lose control of your own business and watch it be slaughtered, then sold by the pound? 

The choice is always yours. 

Ray Zinn is an inventor, entrepreneur and the longest-serving CEO of a publicly traded company in Silicon Valley. He is the author of “Tough Things First” (published November, 2015). Zinn is known best for conceptualizing and, in effect, inventing the Wafer Stepper and for co-founding semiconductor company Micrel (acquired by Microchip in 2015). He served as CEO, chairman of its board of directors and president from the company’s inception in 1978 until 2015. Zinn has been mentioned in several books including “Essentialism” by Greg McKeown. 

 

 

 

 

 

 

Comments

By Paul Scott

Having worked with VCs and been to more than my share of Silicon Valley pitch sessions, I have to agree with Zinn. Far too many venture capitalists have nothing but short-term profit goals and forsake longer-range vision. Perhaps they are committed to their investors to turn profits within a time frame, but this distortion is inflicted on their portfolio companies. I have met founders who spend almost no time at their companies, but lots of time on the road begging for their next round.

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