Saturday, March 06, 2010

Symbiotic or Parasitic?

I'm working with my MBA class these days on the various challenges between company founders, founders and funders, and multiple funders. Lots of permutations if you have multiple founders and several rounds of funding, and it deserves some thought in the early days of a venture. Some of our work focuses on cases, articles and discussion about the "long shadow" that early funding decisions cast into the future of the organization. I encourage entrepreneurs to think about how they can design an organization that can best balance these sometimes competing perspectives.

But while organizational design is important, the day to day relationships are also important. Last week, our class centered around the question: "can founders and funders get along" ... and eventually prosper? To many, the answer is "NO." Not just for my students, either; I hear this sentiment from many who are interested in being entrepreneurs, and from entrepreneurs as well. Yet when pushed for examples, one discovers more legend than fact. Somehow, it has become widely believed that investors are bad for ventures. Many people seem to think that investors want to come in and steal the company away from the founders. I think this is a rare case, and usually occurs after a "series of unfortunate events" (as the saying goes).

What is the effect of this "venture legend"? If an entrepreneur starts out with this mindset, might they create a self fulfilling prophecy? Why would a good investor invest in a venture team that views them with suspicion? To paraphrase, "to make an investor trustworthy, you must first give them trust." How can founders and funders get along?

Here is my advice for start ups that require outside investment.* An investor is paying you to do what you want to do more than anything else in the world. (And if this isn't true, your likelihood of funding, or success, seems remote to me). At the same time, you need to create value and share some of it with your investors. As others before me have advised, think about getting money as "hiring an investor." And, just as with any new hire, work to build a trusting, informed, respectful, mutually beneficial relationship from the beginning. Avoid the trap of seeing an investor as a potential parasite, sucking your cash and resources, intent on taking over the host. With your investors, focus much more on offense (how they can help your venture) than on defense (how they can harm your venture).** From identifying potential investors, to meetings, to negotiating terms, to building your board. Offense.

The entrepreneurs I respect build a symbiotic ecosystem around their company, including their relationships with investors, suppliers, employees and co-founders. As with many systems, these interconnected relationships seem more resilient when the inevitable set backs do occur.
*You may have skipped over this clause. Don't. Deciding on whether you need outside capital, and the form it takes (debt or equity) is one of the more important decisions you will make as founders.
** Note I did not say "don't play defense." I said focus more on offense.


Nathan said...

I would like to make an little illustrated book of "Venture Legends!" (exclamation added for camp value). The style would be circa 1950s Action Comics and be a mix of Mad Men styled modern day people. There would probably be a little expose of people in situations, such as "Th Case of Parasitic Investors!", with a sort of Dues Ex Machina/Captain Planet entrance of Paul to dispel the myth, and allow everyone to work co-operatively. After which, they'd all go out for ice-cream. On equally serious note (because I was serious about everything I just wrote), it would be really good to know these Venture Legends, I believe a number of people I know in the design field would benefit from such knowledge, and it would promote greater understanding all around.

Unknown said...

Paul, I think that the current urban legend is fueled by the cynicism that many individuals have for banks, powerful institutions, and, of course, government. The other reality is that the majority of venture funded companies fail. The later days of engagement in failed enterprises can be painful and the gloves come off when investors are trying to recoup their losses. It might be interesting to track inventor/investor sentiment through the life of a company from introduction to IPO.
The experience that troubles me is how companies fail to live up to their promise to keep minority investors informed of the progress, or lack thereof, when a company levels off without having achieved the projected growth and liquidity event. Many investors have valuable business acumen and the companies lose access to that when they neglect the relationship.
Capital is the key to realization of the inventor's dream and it is important that they school themselves to nurture the relationship.
David Cunningham - The Damer Group