Lines of Communication Should you let your employees talk directly to your VCs?

You are the CEO of a VC-backed company. While you are eating lunch with a customer one day, you notice your VP of sales walking into the same restaurant with your lead VC. You are in the back of the restaurant and they don't notice you, so you sneak out after you are finished. At the end of the day, you notice that neither your VP of sales nor your VC has mentioned this lunch to you. Should you be concerned?

Probably. Your problem isn't that they had lunch together or that they're talking--it's that neither of them mentioned it to you. It's likely that you haven't established the appropriate communication dynamic between your VCs and your executive team.

I have a simple rule as a VC: Anyone on the leadership team should be able to talk to me at any time, about anything. However, they should assume that anything they tell me (other than instances of fraud) will be something I will be comfortable talking to the CEO about. This doesn't necessarily mean that I will--just that I reserve the right to. It should be expected that I will at least communicate that the conversation took place.

There's a perception among some CEOs that they need to control the communication between their team and their VCs. While this may be true in some cases, I've found that it's usually some combination of a misperception among CEOs about the role of the VC, the CEO's own level of self-confidence and the desire of the CEO to elevate his importance in the system by being a single point of contact. This dynamic often works against the CEO, especially in situations where either the business is having trouble, or one of his direct reports decides to contact the VC directly about an issue (usually one related to the business having trouble). VCs hate to be surprised and often overreact, creating even more problems.

The solution is simple: As CEO, establish a clear and open communication culture between your VCs and your leadership team. Encourage people to talk to one another about whatever they want, with the expectation that your VCs will close the loop with you when it's appropriate. Start from a position of trust and openness and then reinforce it with your behavior.

I've found a much higher degree of success in entrepreneurial companies with an open culture of communication among the investors, board members, CEO and executives. It's hard enough getting a business up and running; having forced barriers to communication between the key leaders and influencers of the company just makes it more difficult.

The Importance of Openness

Other VC experts weigh in on why and how venture capitalists should interact with the employees of the companies they fund

Tom Huseby is managing partner for SeaPoint Ventures and has long-standing relationships with Oak Investment Partners, Hunt Ventures and Voyager Capital. He was CEO of both Metawave and Innova.

"One of the many ways a startup can be screwed up is by having a disconnect between management, investors and employees. I ask the CEO to present to everyone at the company what is presented at board meetings, so that there's a tight linkage between what the board hears and what the rest of the company hears. I also always tell the CEO when I'm going to have a conversation with someone else at the company, and I report back on it. If there ever is content I can't tell the CEO about, I have a problem that needs to be fixed."

Bill Malloy is a venture partner at Ignition Ventures. He has been CEO of several mobile, internet and software companies and spent 11 years as an executive at McCaw/ AT&T Wireless.

"Having been both a CEO for venture-backed companies and the Ignition board member in companies we have invested in, I have always been comfortable with employees talking with the VC representatives. I came from a '360-degree' environment at McCaw and other places where there was very open communication up, down and across the organization. The CEOs at Ignition-backed companies are, by and large, cut from the same cloth and, as a result, encourage us to meet with their teams. From time to time, we'll get requests for assistance or updates from employees. All in all, it produces a healthier working environment."