Key to investor-startup relationship? 'Absolute proactive candor'

Updated Nov. 16, 2009 at 7:56 a.m.

Key to investor-startup relationship? 'Absolute proactive candor'

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Note: The Skinny blog is written by Rick Smith, editor and co-founder of Local Tech Wire and business editor of WRAL.com.

RESEARCH TRIANGLE PARK, N.C. — From the fire into the frying pan? That's Kip Frey's career change – becoming the CEO facing grilling from the money people.

The veteran venture capitalist and successful entrepreneur has plenty of wisdom to share, so The Skinny asked for it as he returns to the management ranks.

But first, what's it going to be like to have two of his former partners at Intersouth on the board of his new gig – music software startup Zenph?

"I will put pressure on myself not to disappoint them, but I don't anticipate any difficulties," Frey said of Mitch Mumma and Katrin Burt. "They're great investors, and I know what they need and want."

The biggest early challenge?

"They might make me wear socks at board meetings."

Now, the serious points:

"Absolute proactive candor" is crucial for the money people to get along with the company builders.

"VCs need you as much as you need them," he reminds entrepreneurs.

"Perhaps now more than ever," the struggling economy requires innovation.

These are some of the highlights from a Q&A with Frey, who is ending his decade-long career as one of the Southeast's top venture capitalists at Intersouth to become chief executive officer at Zenph. He's built and sold successful ventures before. He's ready to try to make Zenph a driving force in the music industry, working with company founder and Chairman John Walker.

Intersouth and Capitol Broadcasting, the parent firm for LTW, led a $10.4 million round of investment in Zenph that was announced last week.

The Q&A:

What are the most important lessons you learned as a VC, having worked on both sides of the business?

Relationships between entrepreneurs and investors are complex in many subtle ways, and it's quite difficult for either to fully understand the other. So, absolute, proactive candor becomes really critical. Most of the negative aspects of investments I've observed have their roots in poor communication.

As you look back on your VC days, what advice would you give to entrepreneurs seeking VC funding? What were some of the biggest/worst mistakes you saw entrepreneurs make?

First, realize that VCs need you as much as you need them. Next, treat your investors as true partners. Seek their advice and share your concerns. Don't hold back and don't try to sanitize the situation. Finally, just be a good guy (or woman). Make your investors proud to be in business with you.

Maybe the most common mistake I've observed with entrepreneurs is viewing the VC relationship as adversarial. Fundamentally, the interests of an entrepreneur and a VC should be aligned. If that's not the case, either the deal isn't right or the individuals involved don't really understand.

The economy remains a tough environment, and the venture industry faces its own challenges. Do you believe the VC industry will survive and regain the funding support it had before 2001 and then in the post-2002 recovery? What changes must the industry make? Please explain.

Although everyone is facing a challenging economic environment, I don't think the VC industry is in a questionable situation regarding its survival. Perhaps now more than ever, the U.S. economy requires innovation to fuel its growth, and innovation requires capital. I tend to think of 1998-2000 as the exception rather than the rule, so I'm not that concerned with comparisons to funding levels of that period. Some people say that there is a shortage of venture capital right now, especially in our region. I would disagree and put it differently: right now there is plenty of capital available for good venture deals. There is, however, a terrible shortage of capital for bad venture deals.

Will your new venture seek funding beyond Intersouth?

Yes.

How will the company invest its new funds?

Technology development, branding, market expansion.

Will the founder continue to play an active role in the company?

Yes. John won't just be active, he will be critical. I wouldn't have done this had he not agreed to continue on with me.

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Tags: Venture & Innovation, Intersouth, Local Firms

The Skinny

WRAL Local Tech Wire Publisher and Editor Rick Smith dishes out tidbits from the local technology sector. Read more articles…

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