What Causes a VC to Try to Force a Founder Out?

A business results from the collective input of the people who help build it. Every decision this business makes, and every financial step it takes comes after rigorous scrutiny and a lot of

A business results from the collective input of the people who help build it. Every decision this business makes, and every financial step it takes comes after rigorous scrutiny and a lot of evaluation. In order to make these important decisions and lead the company towards a common goal, every member of the business has to be aligned with the goal. 

On the other hand, venture capitalists may occasionally take over the roles of the founders of the startups in which they have invested. Why does that happen? Well, the answer to this question is a bit complex and can be broken down into four reasons. 

Keep in mind that these reasons are slightly different, but the main one is that the startup was not able to make enough money to stay in business and give investors a substantial return on their money. 

But we need to dig a bit deeper and look at the problem with a better resolution to understand the subtle factors that accumulate over time, leading to the replacement of the founders of the startup. 

What Causes a VC to Try to Force a Founder Out?

1. Going Against the Interest of Shareholders 

The founders of any startup are the heart of the operation. They are the most important people in the business because nobody understands the vision better than they do. However, as the venture grows and investors pool in, the vision of the business takes a back seat. Then who sits in the driver’s seat? Profits. 

Since the investors want to make a good return on investment, their interest shifts towards making the business profitable, or at least scaling it to some extent. This leads to creative or authoritative clashes among the founders and the venture capitalists. 

Replacing the founders of a startup is not an easy task and may potentially lead to a lot of disorder and management stress. However, if the founders make decisions that go against the interests of the shareholders, the venture capitalists may vote for their replacement and get someone who can take the company in the direction the shareholders want it to go.

2. Poor Decision Making

Sometimes, when the startup begins to grow, it can put a great deal of pressure on the founders. Starting a business is difficult, but managing expectations and investments from venture capitalists is even more challenging. 

This pressure and demand can disorient the founders’ decision-making abilities, leading to one or a series of poor decisions that ultimately harm the company, either financially or in terms of its reputation. This can lead to venture capitalists and other investors seeking the replacement of the founders. 

However, this does not mean the founders are completely thrown out of the company. In this case, the usual modus operandi is to offer the founders a different position in the company that restricts their decision-making power. A new CEO is appointed and sometimes there’s also a complete overhaul of the C-suit of the company.

3. Slow or No Growth 

Oftentimes, a startup is like a tree that requires a lot of water and sunlight. But unlike the tree, here the water is a monetary investment and the sunlight is a time investment. Despite years of both of these nourishing inputs, a startup fails to grow properly or does not grow at all. 

When venture capitalists invest their money in a business, they give the business a limited amount of time to scale up and make their investment worth it. When the business fails to grow as much as the investors want it to, venture capitalists start taking some drastic steps.

Now, the investors cannot just pull the plugs and shut the company down, as it would mean losing their money. So instead, they decide to change the founders of the company and replace them with someone who can change things around and make the company thrive again.

This is a type of gamble because replacing core business members can consume significant resources and, if not done correctly, can result in a cash bleed that can lead to the company’s untimely demise. So the investors risk a lot of money in this management surgery, hoping that it might just be successful. 

4. Expertise and Exit

A startup goes through many cycles of change. As more people get into the business, it needs a proper operational structure to manage the work efficiently. Although it is rare to have the founders replaced during a reorganization of the startup’s structure, sometimes, either due to legal or financial reasons, the venture capitalists might deem replacing the founders fit. 

Venture capitalists know how important good leaders are for startups. Sometimes, they decide to bring in new leaders who know a lot about the industry and have a history of making similar businesses successful. This helps the company grow faster because these experienced leaders can understand the industry better and take advantage of new opportunities. 

Also, VCs might change the leadership to prepare the company for a big sale or to become a public company. They do this by choosing leaders who make the company more appealing to buyers or investors. This careful attention to who leads the company shows that VCs really want to make the most money from their investment and keep the company doing well in a tough market.

The Takeaway

Imagine you've built a small business from scratch, putting all your effort and love into it. It's like your own child, and only you truly understand its potential. You might hesitate to bring in outside help, even if it means faster growth.

Letting go can be tough, but sometimes trusting others with specific skills is what your business needs to reach its full potential. It's a difficult decision, but it can lead to bigger success for everyone involved.

This is what startup owners go through with venture capitalists (VCs). VCs can offer money to help your business grow, but they might also want to replace you with someone more experienced to run things. 

This can be scary, but it's not meant to hurt your business. Instead, VCs want to choose the best person to succeed, even if it's not you. For this reason, it is important to choose an investor wisely. With the YNOS VCs platform you get to filter investors based on your requirements and connect with them instantly.