Dec
13
2006
Venture capitalists know something the average investor does not — in business, you always bet on the jockey, not on the horse. An experienced and successful CEO with a great track record of success can always attract start-up backing for a new venture that an unknown CEO cannot access. Experienced venture capitalists never bet on new technology until they have faith in the person who will be responsible to guide the early-stage company to long-term success.
In the context of Rule #1 investments, you want to invest in companies that are led by a great CEO and senior management team. The two distinguishing characteristics of a great CEO are:
1. A great CEO is owner-oriented — his or her personal interests are directly aligned with those of the shareholders of the business. You want the CEO to be making decisions as if the company they run will be the only asset their family owns for the next 100 years. Someone like that won’t try and fudge the numbers or bury some important information just to look good one year. Nor will an owner-oriented CEO do anything silly or shortsighted. He or she will act prudently, which is exaclty what you want.2. A great CEO will be driven — he or she will want to achieve something noteworthy. The best CEOs are on a personal quest to achieve something audacious and cool. Although they are personally well off, these CEOs can’t wait to get to the office every day to make some progress towards their goal. If you can find a really smart CEO who is knocking himself or herself out to achieve something impressive, great things can also happen for you as an investor.
To find a great CEO, look for these tell-tale signs:
The CEO will talk about their goal or their vision at every opportunity — so it will come through loud and clear in every news article they are interviewed for and in every letter to shareholders or other communication. Good CEOs will also minimize their own input and give credit to others for the progress made towards achieving that goal.
The CEO will be regularly buying more shares in the company — rather than selling in advance of the release of bad news. Great CEOs put their personal money where they work. They have some skin in the game. The only exceptions to this rule are where CEOs sell some stock to fund various charities and other investments according to a previously disclosed schedule rather than in response to good news or bad.
A great CEO won’t be earning a huge salary — but will be perfectly happy to be compensated the same way every owner is through the growth in value of his or her shares in the company. Most of the great CEOs are already multimillionaires, so they keep working because they love what they’re doing. These are the type of CEOs you want. Naturally, they should get a reasonable salary and perks but the bulk of their compensation should be in the form of stock and options. If there is an obvious disconnect between what a CEO is saying about the state of the enterprise and what the Big Five numbers show, this is usually an excellent early warning signal to get out or stay away from this company. You can and should trust the numbers far more than what any overpaid company executive says.
Rule #1