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Wednesday, June 23, 2010
VC takes the startup reins – for a while
By Michael Gurau, president of CEI Community Ventures
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I’ve often thought of early-stage venture capital investing in fast-growth companies as akin to rally-style racecar driving. In this analogy, the entrepreneur is the driver, while the investor puts some gas in the car, jumps into the passenger seat to help avoid road bumps and provide some direction to find the fastest path to the shared destination. Driving on the autobahn that is the venture capital business, one sees a lot of crashes and breakdowns, ever in search of the best exit.
With that as background, I’ve been driving down the road with Foneshow, a Portland, Maine, company that has been delivering interactive audio content to mobile phones since 2007. It’s been a tough trip, in large part because of the recession of 2008-09, which dampened both the business and consumer markets’ interest in a new mobile audio service and the venture capital funding market. So, my fund and co-investors needed to supplement our capital. At the end of 2009, the company’s starting driver had had enough and announced he was going back to Silicon Valley.
This kind of thing is not uncommon. Founding entrepreneurs get out of the driver’s seat for all sorts of reasons, some voluntary, some involuntary. In this case, the founder decided that going forward with the challenge of capital markets, unrealized objectives and disappointed investors was not going to bode well for him, economically or professionally.
So, this situation left investors with few options, the most obvious being to shutter the company and sell the assets for what investors could realize, which was not a happy prospect. Normally, I might resign myself to this reality. In this company’s case, however, I decided to step up and see if I could play a more active operational role to bridge the company to a better path, whether a higher-value exit or, preferably, new financing with a new leadership team. So, I sold my co-investors on the notion of my taking an interim CEO role to see what I could do to rebuild value.
Like disappointing outcomes, the act of venture capitalists deciding to drive abandoned cars they helped to build happens more often than many might think, particularly with active early-stage investors who do more than pick stock and await returns. In the fund I’ve managed since 2001, I’ve helped draft business plans for most of the nine companies the fund has backed; Foneshow was one of these and I feel particularly strongly about its value proposition and place in the market. And having played different operational roles throughout my career (in software, marketing and general management), I didn’t feel as helpless as I might otherwise.
So, what happens next? I’m working with the company’s investors and board to rebuild the team and plan with a view to raising capital in the fall from angel investors and/or venture capital funds. The investor group is working with the company’s other co-founders, who, in contrast to the business development-oriented departing founder, carried the technology side of the equation. We’ll be looking for additional technology, management and business development leadership (Interested? E-mail me). Clearly, I would not take this on if I didn’t believe in the product-market opportunity and the prospects for funding, even in this post-recessionary, pre-expansionary economy.
As luck would have it, one of Foneshow’s most proximate peers in the mobile audio space — New Atlantic Ventures’ Stitcher — just got a $6 million round of funding from one of Silicon Valley’s most prominent and successful VC investors, just weeks after I’d made the case for jumping in. To me, this was a market-affirming event for mobile interactive audio signaling, both a reemerging ad market and a reemerging venture capital market.
Maybe I’m delusional, but I feel a great sense of optimism even in the face of the challenges of this transition. While I’m accustomed to losing and walking away, I could not see letting this one go so easily into that dark night. There’s plenty of risk here and I make no guarantees that I’ll find that bridge to more open road. But for now, the car’s still running and it’s a good day for a drive.
Michael Gurau carries a lot of business cards these days, including as president of CEI Community Ventures in Portland. For Foneshow purposes, he can be reached at mhg@ceicommunityventures.com. Otherwise, try him at mgurau@clearinnovationpartners.com.
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