Rookie Mistakes: The Most Common Misstep of a First-Time CEO

Over the years I have seen it time and time again. A first-time CEO raises capital or closes a big one-off deal that generates significant cash for the business and then starts spending like a drunken sailor. Flush with the success of bringing money in the door, he abandons all discipline under the assumption that additional dollars will soon follow through new investors or company sales. He’s now the big shot CEO with a few million in the bank and he’s forgotten what it means to be a fiduciary and how it is more important than ever to tightly manage cash. What if he can’t raise any more capital or sales are lower than projected? His reckless spending just put his company in an extremely precarious position.

Here’s what I advise first-time CEOs to prevent this from happening:

1. Remember you’re a fiduciary first. It’s your job to maximize value for the company’s shareholders. Use value creation as your compass for all spending decisions.
2. Track against the milestones you need to hit to secure that next investment or sale. Emphasize substance over style. Stay focused on the priorities that will make your company more attractive to investors and more competitive in the market.
3. Apply the discipline used for non-dilutive grants to equity investments. Many of the companies we work with were built on grants which come with rules and requirements on how money is spent. Treat outside money as if a grant committee (not to mention your board and shareholders) is looking over your shoulder.
4. Manage by the numbers and to a budget. It’s true what they say, “You can’t manage what you can’t measure.” Create a budget and treat it as a living document and a daily management tool. Then, take it one step further and create upside and downside budgets with clear metrics so you’re not caught by surprise if things don’t go according to plan.
5. Keep a close eye on cash flow. You may feel fancy operating on a float, but before you know it, you’ve fallen into a vicious cycle of robbing Peter to pay Paul and eventually that will catch up with you.
6. Preserve capital and stay lean. That 7-figure number in the company bank account may not last as long as you think it will. Even when it seems momentum is behind a company and funding is inevitable, raising capital is never a given. Small expenses add up over time and good CEOs (and fiduciaries) learn how to say “no.” If it’s not in the budget, there better be a good business reason for tacking on an expense.

As an investor and as a hedge against undisciplined spending, I make it a practice to discuss budgets, goals, and metrics with the CEO before finalizing any investment. We discuss philosophies behind bonuses and option awards. My reason for doing this is not to challenge an expense or someone’s salary, but to make sure a CEO has a plan — and the discipline to execute.

Unfortunately, this approach isn’t foolproof…as we learned from one of our MPVF I portfolio investments. The rookie CEO checked all the boxes, but everything changed after the investment hit the bank. This was the first time she had ever raised money from external investors and one of the first things she did was move to a plush new office costing about $30k per month. Then she missed a major milestone and things continued to unravel from there. Luckily, the technology remains promising and the company is continuing to operate, mostly on grant revenue. What we learned from this experience is the importance of scrutinizing the Board of Directors. Does the Board have the experience, influence and, most importantly, the backbone to stand up to the CEO and put the right financial checks and balances in place? The Board also needs to put metrics in place to evaluate CEO performance, even if the team is virtual or there are only a handful of full-time employees.

-Ron Heffernan