Venture capitalists: Gekkos or good people? Triangle legendary VC Mitch Mumma says …

On Jun 6, 2022

Editor’s note; Billy Warden is a writer, marketing exec and multimedia producer based in the Research Triangle, where he co-founded the p.r. agency GBW Strategies. He’s a regular contributor to WRAL TechWire. Today he goes one-on-one with one of the Triangle’s most successful and legendary venture capitalists Mitch Mumma of Intersouth Partners.

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DURHAM – Money may or may not be the root of all evil, but it certainly is the stuff of which Hollywood villains are made. From spiteful ol’ Mr. Potter in “It’s A Wonderful Life” to dashingly dangerous Gordon Gekko in “Wall Street,” the nastiest customers in our pop culture imagination are often in the business of bucks – big, BIG bucks.

Recently, VCs have taken the spotlight for their roles in propping up now-crumpled unicorns WeWork and Theranos. In a piece on TV series “WeCrashed,” the U.K.’s Independent opined: “If (WeWork founder Adam) Neumann flew too close to the sun, then it was deep-pocketed private investors who slapped on his feather-and-wax wings. By consistently funneling money into the company based on little more than Neumann’s grandstanding and promises of untold returns, they were creating the conditions for what The New York Times called ‘an implosion unlike any other in the history of start-ups.’”

Meanwhile, Bloomberg Businessweek’s May 30th cover shouts: “The Great Tech Rout: As a growth industry staggers, where will we go from here?”

Mitch Mumma

To balance the ledger, I invited the legendary Mitch Mumma, managing general partner of Durham-based Intersouth Partners, to share his take – through this column’s pop culture lens:

The portrayal of VCs and other financial types in pop culture is often less than positive — from Mr. Potter to Gordon Gekko. What do these caricatures get wrong about the role of financial folks?

One of my biggest pet peeves is venture capitalists being lumped in a category called “private equity.” There are many types of private equity with the largest segment being leveraged buyout funds or LBOs. These are the firms that were the “corporate raiders” of the 80’s and 90’s that would buy an established business using largely debt (hence the term leverage), then strip assets, lay off people and find other ways to make a company more financially “efficient.”

Although they made a lot of money for their investors and themselves, they developed a bad reputation (think “Barbarians at the Gate” in 1989 about the buyout of RJR-Nabisco). Over time they stopped using the term “LBO” and began to use the term “private equity” which sounds nicer but also includes venture capital. Venture capitalists partner with entrepreneurs providing capital to new companies attacking new markets with limited revenue and negative cash flow. It’s about building something from nothing and is almost the opposite of what buyout firms do, yet we get painted with the “private equity” brush.

There are Gordon Gekkos and Mr. Potters in the world but the vast majority of financial people want to see the companies they invest in succeed and truly act as helpful coaches. In the end, the need for return on investment can lead to difficult decisions, some of which aren’t popular with everyone.

Gordon Gekko’s ‘greed is good’ speech in “Wall Street” seems to have set the pop culture perception of financial folks. If you were to write a defining movie speech for a VC character, what would be your theme?

It would definitely be about coaching. The best VC’s realize they are coaches, not players. The entrepreneurs are the players and it’s our job to bring out the best in them and help them succeed. I haven’t seen every mistake made, but I’ve seen a lot of them and hopefully I can help the entrepreneurs avoid the obvious ones. The entrepreneurs get the credit because they play the game every day. I’m thinking Gene Hackman in “Hoosiers” or John Candy in “Cool Runnings.”

A run of ‘prestige TV’ series has dug into how investors get caught up in startups such as WeWork and Theranos. How do VCs vet and keep an eye on companies?

The best VC’s take an active, constructive role on the board of directors. The number one job of all boards whether public, private, or non-profit is to make sure the right person is leading the company. They need to attract, retain, compensate, and replace, if necessary, the CEO. Beyond that, good board members help set and regularly monitor corporate objectives that create value for all stakeholders.

Looking at results versus budget is a simple, but important example. In the cases you mentioned, the entrepreneurs were so dynamic and able to continue to raise capital at increasingly unbelievable valuations, the board members were blinded by apparent success.

But raising money at a high valuation isn’t success. Most boards don’t make a change until it’s too late because it’s hard to do. I’ve never been part of changing out a CEO where the employees didn’t say “What took you so long?”

That’s why it’s important to have relationships with other members of the management team and not get all your information from the CEO. CEO’s that control information flow to the board should be a red flag for board members. Sometimes the founding entrepreneurs are critical for the vision of the company but many of them shouldn’t be in charge, particularly at later stages in a company’s life.

There is a reason Tim Cook was COO of Apple and Sheryl Sandberg has the same role at Facebook. I’d say those two boards got it right.

To put it in super simple pop culture terms, how are VCs the ‘good guys’?

I think of John Doerr, who was the first venture capitalist to become a billionaire. He, and now many others, have used their wealth to attempt to solve some of the biggest problems we face as a society today like climate change or food insecurity. Many wealthy entrepreneurs become venture capitalists to do the same thing. Think about the impact that someone like Bill Gates and his foundation have had on these big problems. These are people that think way outside the box and have the money to make things happen.

What are your favorite movies, TV series and/or books (fiction or nonfiction) about starting or investing in a business? Why?

I thought HBO’s “Silicon Valley” series was great. It was produced by venture capitalists who really addressed big issues, like the lack of women in venture capital for instance, with a ton of humor albeit a little vulgar. Frankly, I prefer the stories of entrepreneurs struggling to build successful companies – like “Tucker” or “Joy” – where the investors are part of the story but not the main attraction.

Bloomberg Businessweek is touting “The Great Tech Rout” on its cover. How does a seasoned venture capitalist maintain his cool and counsel others during shakey times?

I’ve been through three other major downturns and the same thing happens every time. Returns are great, too much money comes into the system to chase those returns which inflates valuations and then returns go down. Investors have a mindset that everything is up and to the right until it isn’t. Entrepreneurial companies need to remember it’s a “get rich slow” scheme. To build real value takes time and by the time you have an exit, everything will be moving up and to the right again. Just make sure you have the staying power to get there. You should have already made the hard decisions on capital and burn rate.

Are there any movie, TV or literary characters that you particularly relate to, draw inspiration from?

I like Tony Stark (Ed’s note: aka Iron Man) because he takes risks, creates new things, and uses his own money to do it. Nobly, he died to save the universe. I’m hoping to not have to make that choice.