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How Activist Should Angel Investors Be

How Activist Should Angel Investors Be

I am the lead investor in a healthcare startup and I recently received a phone call from one of the other co-investors who is part of the network through which I invested. I happen to be the lead because I am a doctor, which presumably makes me the domain expert and because I invested the largest amount of money. I have been very impressed by the entrepreneur. He is very hard working and grounded, and I have learned a lot by being on the board of this company.

However, this co-investor was very upset and worried because he felt that the company was running out of cash, and that they weren’t doing anything in order to increase their revenue. He felt that I wasn’t being proactive and was shirking my responsibility as a lead investor. He felt it was my job to push the entrepreneur into fixing the problems. He felt that the entrepreneur needed to change his selling style and become far more aggressive about reducing costs and increasing revenue. His concern was that the company would not be able to survive for more than a few months unless we investors did something to turn things around.

What upset him was the fact that he’d made a lot of suggestions to the entrepreneur as to what he could do in order to improve his business plan and fix the issues. However, he felt the entrepreneur was not being responsive and did not seem to take his suggestions seriously. He felt he did not bother to implement them or provide any feedback as to what he felt about his advice.

He was very disappointed with the way the entrepreneur was performing and was very unhappy with me as well because he felt I wasn’t doing a good job as a lead investor. He was unhappy with my approach because he felt I was being too casual and wasn’t representing the other co-investors’ interests adequately.

Investing Styles Differ: Passive Versus Active

He was a lead investor in another company, and he was far more interventional and hands-on when talking to the founder. He felt that this is why the entrepreneur was much more responsible, and be believed that thanks to his close continual interactions with the founder, he had been able to turn the company around. He was very disappointed that I wasn’t doing the same thing with the startup in which I was the lead investor.

Now he had a lot of valid points. He was being proactive and wanted to make sure that the company was doing well financially. He was worried that the company didn’t seem to be going anywhere and that if it ran out of cash, he would lose his investment.

Unfortunately, my worldview is completely different from his. Healthcare is a complex and challenging domain. This is an industry where very few startups are actually making any money, because it’s still immature, and we need to be far more patient. It’s hard to pivot or generate revenue, because it’s an industry which is very resistant to change, and it takes time to create inroads.

More importantly, I had very high regards for the entrepreneur. It’s true that he wasn’t very flashy, but he was very grounded and mature. He was frugal and ran an efficient operation. He wasn’t a pushy salesman and had a good reputation in the healthcare space because he’d been around for so many years. He was held in high regard because he had been able to execute successfully.

It’s not as if he wasn’t aware of the fact that his company was running out of cash or that he was doing nothing about it. It’s just that it’s sometimes hard to be able to generate revenue in certain industries, but it wasn’t for lack of trying.

Sometimes, the environment can be so unfavourable that the headwinds make it hard for even good startups to survive. I was willing to be much more understanding and forgiving because I could see he was doing his best.

I could also understand the co-investor’s perspective. He was upset because he felt that the entrepreneur didn’t respect his advice and wasn’t listening to his feedback. This can be a sore issue and it upsets me as well when entrepreneurs ignore what we tell them.

An Investor Is Not An Entrepreneur

However, I have learned to be more laid back. My approach is that the company is the entrepreneur’s – he’s the one who started it, and while we have given him funds in order to help him to grow, he is the one who needs to execute.

While I’m happy to offer advice, I cannot ram it down someone’s throat just because I happen to be an investor – I don’t own him or the company just because I have funded him. I see my role as providing a mirror and acting as a coach. I can remind him of the problems he is likely to run into, and offer possible solutions, so he can think through these.

I am happy to engage with a founder if he feels I add value – otherwise, there’s no point in doing so. It’s a waste of both my time and energy and his and I would rather deploy this elsewhere. It’s easy to talk about the need to raise the next round of funding, but this can suck up a lot of energy and prevent him from focussing on delivering results to his customers. He needs to make his decisions for himself because he’s the one who needs to set his priorities. While it’s very easy to give advice sitting comfortably in my air-conditioned office, a lot of it may not be very practical in the real world, and he is the one who is fighting for survival in the trenches.

In Conclusion

I have realised that angels come in all shapes and sizes. We have different perspectives and I prefer staying out of a mature founder’s way until he asks for help. I don’t like meddling and prefer monitoring the performance from a distance. This is why it’s important to make sure perspectives are aligned before investing.

I couldn’t get my co-investor to agree with me, so I signed off by telling him that I had a lot of confidence in the entrepreneur and that even if this startup went belly up, I would be happy to fund his next venture.


[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]

Author

Aniruddha is Director at Solidarity Investment Advisors

Responses
https://inc42.com/resources/b2c-please-step-aside-comes-b2b-saas/
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