March
22, 2021
8 min read
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Marshall B. Rosenburg, founder of the Center for Nonviolent Communication, once said: “At the root of every tantrum and power struggle are unmet needs.” This quote sums up the story of the start-up founder-investor relationship.
When an entrepreneur and an investor first team up, it is almost akin to the initial phases of falling in love. Each side sees the common interests and vision of success, and nothing can come between the partnership except failure. Unfortunately, just as perfect love is an illusion, the path to an ideal partnership is arduous. Many outsiders do not know that this relationship dynamic can either make or break an organization depending on what is at stake. Power, money and success form an intoxicant that brings people together and also causes them to drift apart. Both sides’ perspectives change with the evolving life cycle of a start-up. In part one of this article, I will focus on how founders can navigate the power game, and in part two, I will discuss the investor’s POV.
Amazingly, it is “unmet needs” that inspire an entrepreneur to partake in an unknown journey, driven by hunger, vision and passion. You want to sprint and soar but quickly run out of fuel. And so begins the saga of investor wooing. A founder first approaches an investor with trepidation. You covet the finances to spur growth but risk losing out on equity and ownership control. Investors fund a start-up to multiply their return on investment (ROI). But they worry about the dilution of their equity, too, which impacts their ROI. A typical tech start-up goes through several rounds of fundraising. The longer your timelines, the thinner the investors’ patience. Moreover, multiple rounds of funding often mean diverging interests on the board. How deftly an entrepreneur handles the political landscape is as significant to a start-up’s success as the actual business performance.
“You are fired!” As a founder, these are the last words you expect to hear in your own company. However, this is a real scenario that often plays out in start-ups. As the flaws begin to accumulate, the magic between the founder and the investors starts wearing off. Each side then looks at the situation through their lenses. For a founder who created the start-up, this suggestion of leadership change stabs you to the core. I didn’t peek into the soul of 30-year-old Steve Jobs when he got fired from Apple, but I am sure that he would agree with me that this pain stings. With the romantic veil lifted, you are faced with a difficult choice like Hamlet: “To be or not to be?” As an entrepreneur and a current angel investor, I empathize with both sides. Founders need to realize that when investors seek a management or leadership change, they are choosing the optimal way to get their money back, preferably in multiples. In most cases, it is not personal, it is business as usual.
Related: What Happens When Founders Are Fired
Let’s dive into some tips and insights on how we can survive and rise out of such a challenging situation.
The art of anticipation
The wise person anticipates and preempts future moves; the fool reacts to situations as they unfold. Founders should be cognizant that you lose your absolute control of strategic decisions once you bring outside capital. To avoid turning into driftwood swayed by the higher winds, take control of the strings you do hold. Are you an innovator? Then, invest in your field knowledge so you are perceived as the container of elite information. A strategic genius in your field? Then plan to stay on top of the market competition, manage the timelines. Remember the power of allies. It is not enough that you alone evolve with the company’s life stage while your teammates are left behind. Your early employees are likely to be your closest allies; you picked them for a reason, right? Protect, train and prepare your early employees to grow with the company and strive to put them in power positions. If budget permits, hire experienced industry veterans to lend you their experience. You will need top managers on your side in case of a power struggle with your investors later down the road.
Related: How to Pick the Right Team for Your Startup
The beauty of balancing
Have you ever marveled at the dexterity of a juggler as he tosses several objects in the air, performing the act in perfect harmony? Well, as an entrepreneur, you need to master the skill of balancing. There are multiple forces you need to harness, making sure they are in cadence. First, your product or service needs to cater to the changing market forces, staying ahead of the curve. The idea that you started with may no longer be relevant, so imbibe the art of pivoting. Next, you will have a growing team to contend with, so be aware of impending structural changes. Finally, it is essential to stay on top of board politics by working on your people skills. A single source of capital means power bias. Diversity in the funding sources goes in your favor most of the time. Still, by the time you have to juggle the disparate investor groups, you will have mastered the art of balancing and pocketed some allies on the board, I hope. Whenever a difficult investor situation confronts you, rather than quitting, always remember, they are here because you invited them in the time of your need. This acknowledgment will lead to a deeper introspection of the case on hand.
The rewards of due diligence
Seeking and gaining investors without thorough due diligence is doomed to lead to a dysfunctional relationship in the future. Just like your start-up’s success depends on your early team picks, your early investor team is crucial to your organization’s strategic path forward. Make sure that you are approaching experienced and credible investment sources; this is vital when you want to bring in more significant funding sources such as VCs and private equity down the road. Rushing into contracts with random investors early on means you lock yourself into no-escape deals and you lose bargaining power later. As you start building your investor Rolodex, be aware of group dynamics. Not all investors think alike or have the same values. Sometimes all it takes to bring down a start-up is an unresolved conflict between two warring groups of investors.
Related: More Than Money: How the Right Investor Can Add Lasting Value to Your Startup
The power of honesty
There is no greater power on earth than the virtue of honesty. Deception can take you some distance, but a shaky foundation has never supported a high rise. Be upfront when you are signing a contract with your investors. You must have heard of “promise less, deliver more.” Let them know of the risks inherent in your company timeline and the start-up’s issues and values that are nonnegotiable. Honest entrepreneurs know that business is frequently not easy when you refuse to compromise the truth. Things go south, patience runs thin, and pressure starts building to deliver results. However, investors respect founders who are accountable for their word, so learn to control expectations and confrontations with truth and facts as your power weapons.
The wisdom in walking away
One of the hardest things you can do in life is to let go of your love. A start-up to a founder is the seed you planted and nurtured as it grew into a plant. You did such an excellent job so far that it might come as a shock that you need to trust the higher powers to help ensure your beloved tree flourishes and bears fruits. And that might mean handing over the reins to somebody else who is more adept at that task than you. Rather than acting like a child whose favorite toy was snatched away, founders should look at the bigger picture. Sometimes walking away gracefully is the greatest thing you can do to let your start-up thrive with your dignity and relationships intact. Remember, in the start-up’s success lies your victory.
Many critical factors need to converge to make a start-up successful, the founder-investor relationship being one of them. It often starts on a high note only to get complicated as time passes. Entrepreneurs should know how to design and plan the power game to level the playing field. The tips and insights mentioned above will hopefully lend you an arsenal against mounting investor pressures.