An Open Letter

Dear Portfolio Company CEO,

Hi, my name’s Chris and I fund the folks who fund your
company.  I’m the money behind the
money.  I can’t remember if we’ve met,
after all, I’ve got several hundred cats just like you in my portfolio.  There’s a chance that we talked at your
backer’s last annual meeting; maybe I visited your factory; or perhaps I called
you for a reference check.  You may not
remember me, but I was the dude wearing the red t-shirt under my dress
shirt.  I took good notes during your
talk and told daffy stories during the breaks. 
Yeah, that’s me.

Anyhow, I wanted to drop you a note since I’m a bit worried
about you.  You see, the last time the
economy slumped, we LPs heard endless tales of management teams that just
couldn’t stay ahead of the game.  “We
discovered we had a bull market CEO on our hands,” was a common refrain.  “Those guys were a great growth team, but
when the going got tough . . .” 

It seemed like private equity funds went through CEOs like the
Yankees used to go through managers (although I’ll note that Stump Merrill couldn’t
have been fired fast enough, but that’s another discussion.)

So there I was, talking to my Operating Partner buddy,
Bruce, about this phenomenon and he made a clarifying point:  “Management is always an exercise in battling
entropy,” he opined.  “Order tends to
disorder and the application of energy is required to restore order.  It’s an immutable law of the universe and
it’s a law of management.”  Consequently,
he continued, “in tough times, the disorder comes at you a whole lot faster and
requires a lot more energy to manage.” 

I don’t think that it’s too much of a stretch to say that
energy is a function of time and people who are cavalier about time become
magnets for disorder.  It’s like Lucy and
Ethel in the chocolate factory: the conveyor belt speeds up and there’s just no
place for all those blasted bon-bons to go.

Indeed, the ingredients of any business are: ideas, people,
capital, and time.  And of those
elements, time is the most immutable, the most obstinate, the most
tyrannical.  They’re just not making any
more of it!

You have but one weapon against this cruel oppressor: focus.  
In  good times, managers don’t
have to focus as acutely because the creation of good stuff outstrips the slouching
to disorder.  The great all-weather
managers, on the other hand, have to focus because they realize that time is
really expensive and when the creation of good stuff slows, entropy lies in
wait.  Choose what to do and what not to
do.  Just choose quickly and be explicit
about your choices.

We’re all in this together. 
Your success becomes my success (less, ahem, the GP carry) and I’m
rooting for you.  You guys are the
beating heart of the entrepreneurial economy. 
You guys rock nonstop.  Stay focused
and be careful out there; you’re facing the greatest enemy of all: time.

Forging ahead,


7 thoughts on “An Open Letter

  1. Just a shout out from the invisible internet that your posts are much beloved by me and my crew. Keep on rockin it; don’t be stoppin it.
    We all know too many VCs who picked the CEOs who would cause the least amount of pushback & daily hassle so it would be easier for the VC to sit on that 7th, 8th or 9th board. (LOVING the carry, BTW.)
    But then when it’s all in the fan, those CEOs have no business being The Decider. It’s better if they go back to skiing and try to get 80 days at Squaw this year.
    But they wont. They’ll run around trying to implement insane missives from the out-of-touch vc’s.
    (Funny that in a nosedive, VC’s will lose companies but seldom replace the ceos. Yet, in an upswing, they can’t wait to swap out the founders. Hmmm.)
    So I vote that your letter of encouragement go not to the CEO, but to the founders. The folks who came up with the idea. Who started from Zero. Who got the first product and the first money: YOU folks are always going to be OK.
    You might not make buy-a-jet money with this deal, but that’s because your CEO is a tool and VC was better at vacations in Montana than For Real Business. But if you keep the grind. And Determination, and yes, focus. Then you’ll pull it out.
    And next time, when you join the merry cycle again, you’ll just have to gain customers and beat markets, but not worry about that nose-picking CEO or hypocritically self-righteous VC. And that alone is a win. At least, that’s my plan.


  2. I for one think the VC’s have a pretty sweet gig. These guys get to blame CEO’s when things are going poorly and take all the credit themselves for the upside–no mention of the CEO. Last I tried, I couldn’t even push that kind of logic on my 10th grade football coach.
    And don’t worry about time, VC’s will wait out this environment because, after all, (to be read sarcastically) “under normal circumstances, THIS company would be a definate candidate for an IPO. Nobody’s making money is this market.” Which, as far as I can tell, translates into “Hey, I’m not any smarter than my competition.” And I want to give THAT guy my money?


  3. Chris,
    Your advice to ‘Choose what to do and what not to do…just choose quickly and be explicit about your choices’ is a powerful mantra for the CEO’s….and investors. What we learned in the time before we had to deal with the complexity of identifying which ‘bubble’ we were referring to, is that not all companies should follow an industry standard wisdom. The wisdom of the crowd can be so darn misleading that I wanted to add a voice of caution to following universal, well meaning, advice.
    Looking to the health of the underlying target customer base, and where health is wanting, rapidly adjusting the value proposition (changing focus), while conserving capital, is critical. At the same time, unlike the ‘internet’ bubble our industry is still seeing niches of strong growth. The focus of CEO’s in these areas, ought to be market share capture.
    It’s a rare young company that universally cuts costs, in a growth market, that emerges as a market leader/contender. It’s even rarer that, in difficult times that a slow to no growth firm attracts sufficient capital to warrant incremental investment. It’s the high growth, paradigm changing, firms that we rely upon to generate the returns necessary for us to prosper.
    CEO’s and investors ought to choose quickly which investments are the feeders and growers, and which are best left to their own means to survive. It’s sad, but true, that Darwin was right.


  4. Hi Chris, This is a really great post. Funny and insightful. Am linking it to my weekly ‘news & views’ roundup. Thanks.


  5. Thanks, fan boy. I feel the love.
    @ Mark: it’s amazing how much optionality the LPs are on the short side of . . .
    @ Charlie: good point
    @ Snigdha: thanks!


  6. Glad to see the dude wearing the red t-shirt under my dress shirt spend a little bit of time looking at what is going on with his “alternative investment”. I believe as Mark says that there are a lot of VCs who have it too easy. This is the good news about this crisis is that it is an opportunity to clean up the process a bit.
    The word is out that the VC model is broken, let’s hope we do something about it. And if you really care, I have some ideas on this:


  7. Marc,
    I think the next 12-18 months will be very interesting. On the topic of structural change, this Paul Graham note in pretty interesting:


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