For those who have seen the TV show Silicon Valley (if you haven’t, add it to your list!), it gives a comical, yet very realistic insight into what it looks like for a talented founder to be bulldozed by investors who have different intentions for their business. Raising investment seems to be the top priority for the majority of startups, and whilst it certainly helps, you need to be very careful who you partner with. Before you even start meeting with investors, it’s important to outline what you expect them to bring to the table, and what you are willing to give up in return for their investment (you will have to give up more than equity.)
Understandably, each company will have different requirements, and what works for one founder, might be disastrous for another. According to Business Dictionary, a hands-on investor is defined as “an investor holding a large portion of shares who is either dissatisfied with management or interested in holding an active position in management decisions.” To put it simply, not only does an investor have a stake in your company, but now they are unhappy and feel they need to be actively involved in the day to day operations.
“The investor’s chief problem — and even his worst enemy — is likely to be himself.” — Benjamin Graham
When an investor starts to show signs of being more hands-on, it’s mostly coming from fear over losing their investment, or anxiety over the company’s growth, lack of patience, over-analyzing every task, or even lack of trust in your capabilities. Whatever the reason, this emotional reaction to a rational feeling can quickly spiral out of control. Tempting as it might seem to jump at the first offer of investment, the wise thing to do is to find out more about who you will be working with, what their intentions are for your business and how well your visions align.
65 percent of startups that fail do so because of friction between co-founders and investors (CNN Money 2014). Just think about that for a second, almost two-thirds of startups fall apart not because of a problem with the product but personal issues. As we all know, relationships have their ups and downs at the best of times, however, if you are having an issue with someone who is financing your business it can be the difference between success and failure.
“Unless an investor has access to ‘incredibly high-qualified professionals,’ they should be 100 percent passive — that includes almost all individual investors and most institutional investors.” — David F. Swensen
Chances are this will result in conflict on some level, as the investor’s ultimate goal is to make money on their investment. In many cases, they might have little interest in how revolutionary your product is, or how you are changing the future of your industry (which might take a bit longer than your financial projections estimated). Many investors simply aren’t interested in long-term returns and want to see profit at any cost, even if that means tarnishing the company’s image by engaging in questionable PR tactics. Acquisition seems to be a big deciding factor, and often an investor will think about exit strategies even before the product has launched. Whilst this is not the case for all investors, it’s important to be aware of the possible consequences of partnering with someone who might overstep their boundaries. Like any relationship, you want to work with someone who is your champion and empowers you to achieve your best potential, rather than feeling you have added a nagging critic to the team that you can’t afford to get rid of.
This all comes down to due diligence, just as you would comprehensively research your competitors, the industry, and potential co-founders or employees, put the same effort into researching prospective investors. Rather than focusing on what a great opportunity this is for your company, you should think about what a great opportunity this is for them and place value on who you share that opportunity with. So, put the Dom Perignon away and start reaching out to other companies who have worked with your would-be investor to determine if this partnership really is what’s best for you!
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