Fred Wilson, of Union Square Ventures, has an interesting post on Parallel Entrepreneurs. I too read this weekend's NY Times article about Bill Gross and Idealab. I have thought much about this topic before but never really put a name to it. In some sense, we named our firm "CXO" because we feel that the startup entrepreneur wears many hats at once - he is concurrently truly the Chief Executive, Chief Financial, or Chief Operations Officer - the CXO.
But what happens when an entrepreneur is starting several companies at once? In my early years I did this and I know many people that do. I think that if you are a VC, you must be the kind of person that is placing many bets at once. Fred describes this as the type of person that "can't do one thing at a time." Perhaps if the VC is hedging risk with a portfolio, then the entrepreneur also may do the same by being involved in many startups at once.
This brings up several important issues that need to be addressed in a funding environment. When we are involved in a financing, we require the entrepreneur to disclose all of his other commitments and the percentage of his time that he or she is committing to these other activities. Entrepreneurs usually think this is pretty silly because most VC funds would laugh at an entrepreneur looking for money that is not 100% committed to the company. We WANT AND EXPECT our entrepreneurs to devote 100% of their time and energy to the company. On occassion, when there is a very talented person involved, we have allowed them to do other things. However, in this scenario, we legally bind them to their commitment and give ourselves an out to let them go and cut back their equity and compensation if we feel they are not giving their all. We basically put up such strict terms in place that if their other ambitions are getting in the way, they will lose all of their equity in the startup.
A GOOD ENTREPRENEUR WILL FOCUS ON ONE STARTUP AT A TIME!
You want to bring your A game and give it a good 3 or 4 years to see if it has legs. If you are feeling the itch to do something else, then it is time to move on. You should leave the company completely and move on to the next one. Failure to do so will open you up to legal risk from a litigious investor that feels that you are violating your ficudiary duty to their security.
Interestingly, while VCs have the freedom within their portfolio to spend money and time on the companies they deem will provide the greater return to their investors, even they must address potential litigation by LPs in their partnership agreements. This usually comes in the form of a clause that states if the VC partnership raises a second or third fund that will cause it to concurrently receive management fees from multiple funds at once, it must cut back it's management fees to X percentage on the original fund. What this means is that even the VC firm must in some sense report it's time and energy commitments to its investors.
As an investor, I would always place my bets on a serial entrepreneur versus a parallel entrepreneur.
As an entrepreneur, I believe it is better to focus on one startup at a time.
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