Exploring Entrepreneur Investor Relationship : [“I told you so” moments]
An entrepreneur recently wrote to me wondering how to deal with a situation that had arisen just after funding had been raised. The entrepreneur had raised money from a group of investors after multiple rounds of discussions and based on a business plan with specific milestones. Apparently, in the first board meeting after the fund raise, some of the investors wanted changes to the strategy and goals of the company. Other investors were generally neutral. The entrepreneur who still believed in the plan agreed to was naturally confused.
Investor-entrepreneur relationships are of course paramount to the successful building of a startup. A journey that starts off, ostensibly almost, as an adversarial one during the fund raising process what with the questions, arguments, skepticism and diligence becomes, well at least should, a shared one post funding. Both the investor and the entrepreneur stand to gain – financially and credibility wise – only if the startup succeeds. It is hard for one to win at the cost of the other in most cases – though there have been exceptions to this rule. It is unhealthy therefore to let the adversarial momentum carry forward post funding.
Investors need to realize that they are only backing the entrepreneur’s dream. The entrepreneur is not executing the investor’s dream. And this is an important realization to have. There could be disagreements on strategy and goals but they should remain just that, disagreements. Thereafter, it is the entrepreneur who has to execute and deliver on the promise. If the entrepreneur doesn’t, then there should open discussions about the reasons for the lack of achievement. Investors are not unreasonable and will be open to a revised plan if they’re convinced about the reasons. It is the entrepreneur’s job to convince the investors. However, dramatic changes in strategy (viz changing a business model) immediately after fund raising are not advisable unless there are very compelling reasons.
On an approach not working, it is tempting to say “I told you so” but should be uttered in silence by the investors! On the other hand, upon achieving the goals, the entrepreneur’s confidence no doubt surges and, more importantly, investors view the entrepreneur in a very different light.
Communicating frequently and transparently with investors is therefore a crucial requirement from the investor. Reports with quantitative and qualitative information in a format and at a frequent desired by investors need to be delivered. In addition, meetings with investors to explain strategy, discuss challenges, seek assistance and inputs are all responsibilities of the entrepreneur. Investor relations is one of the important onerous requirements of the entrepreneur, though certainly not the most preferred! It is important for the entrepreneur to have this realization regarding fiduciary obligations. For example, in a publicly traded company, an entire department usually handles investor relations with the CFO being the key spokesperson in this regard.
Many a time, investors will say things perhaps to test the resolve of the entrepreneur. Is the entrepreneur willing to change his entire belief in the plan based on a strong forceful argument made by the investor? Not a good sign! Should the entrepreneur get all concerned and stressed when investors express a point of view on company strategy? Not at all. The entrepreneur should attempt to understand the reasons for the investors’ comments; perhaps, investors have information that the entrepreneur doesn’t and accessing this information could help fine-tune the existing strategy. Entrepreneurs should also know that investors often times quite simply don’t know the operational and market issues and challenges and hence their comments need to be taken with more than a grain of salt. In other words everything that an investor says need not be taken as the final word on the topic.
Investors will however have the final word if the entrepreneur demonstrates a sustained lack of performance with respect to the promise made! There are contractual protections that investors enjoy in such cases and if either the entrepreneur or the investor start reading these clauses after fund raising, it means that the relationship is beginning to crumble. Never a good sign! Maintaining a relationship such that these clauses are never read is the work of a good entrepreneur.
What do you think?
Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at email@example.com. The views expressed here are his own.