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Fixing The Friction Between Founders And Angel Investors

Fixing The Friction Between Founders And Angel Investors

One of the problems in the startup space is the tension between investors and entrepreneurs. This is often the elephant in the room, and it often rears its ugly head during Board meetings.

The focus in these meetings is usually on whether financial targets have been met or not, and since most startups are chronically undermanned and underfunded they are usually lagging behind. This causes the investors a lot of anxiety and gives them a stick to beat the entrepreneur with.

This creates angst in the entrepreneur because he feels that he’s not being appreciated for all the good that he’s achieved so far. Founders feel that all their funders do is give them a kick up the backside because they have not met their goals, and they never get any compliments. The investor, on the other hand, is upset that the entrepreneur is always missing his targets and not being able to deliver as promised in the last Board meeting. After all, the purpose of these meetings is to highlight gaps and then try to fill these in, to ensure that the company does not fail.

It’s often the entrepreneur who contributes to the problem because he typically reaches out to investors only when he starts running out of money. This irritates angel investors because they feel that the entrepreneur treats them as a bank with limitless funds whose only job is to infuse cash whenever they ask for it. This causes the relationship between the two groups to sour which is quite sad.

Find Out How Entrepreneurs Can Better Understand Angel Investors

The truth is that we’d like to give you a pat on your back when things are going well, but you need to tell us about your accomplishments and share your wins on a regular basis with your investors. We are happy to participate in your joy, and it helps if you allow us to feel that we have contributed to your victories! Please share what you have learned with us – this helps us to become smarter and learn more about your domain.

Try to create goodwill by sharing happy moments, so you don’t end up only discussing problems with your investors. You do need to create a reservoir of positivity – you will need this when things go sour. It helps to communicate frequently by sending emails regularly – and you will find that taking the time and trouble to write stuff down will help you to sharpen your own thinking.

Part of the problem is that entrepreneurs feel that their angel investors are very busy, and they’ve got tonnes of other things to do. This is why they keep all their communications for the quarterly Board meeting. While quarterly meetings may be fine for a large company, startup founders need to provide updates on a much more frequent basis to their investors. A startup is marked by volatility, complexity, ambiguity and uncertainty and, because things move much more quickly, waiting for the next Board meeting may allow problems to balloon completely out of control. By this time it may be too late for the investors to provide any useful feedback.

Also, Board meetings are often conducted very poorly. They are often unproductive, and many investors find they are a waste of their time. The founder treats them as a rubber stamp and does not bother to share an agenda in advance which means angel investors cannot prepare properly. They don’t have enough background material to be able to offer thoughtful suggestions and cannot contribute any constructive insights. Savvy founders will bury the skeletons, or gloss over contentious issues and investors feel short-changed by this lack of transparency. Many meetings are dysfunctional because some members get distracted by irrelevant issues as a result of which high priority matters don’t get the attention they deserve.

This is why it’s important that entrepreneurs organise more frequent calls with their investors. These should be once a month – and may need to be even more frequent – for example when you need to pivot because you are running out of cash.

One of the reasons founders don’t share information on a more regular basis is because they are worried that the investor may not understand their long-term vision. They are concerned that funders are so focussed on short-term cash flows, that they may not agree with why they have chosen to doing things a particular way. Founders don’t want their plans to be second-guessed and they dislike being micro-managed, which is why they prefer not discussing contentious issues until they come to a boil.

This is tragic – because investors have signed up because they believe in the entrepreneur’s dreams, and want to make them come true. We think that you will be successful, which is why we are backing you with our hard earned money. We expect to be treated as partners and you shouldn’t keep on worrying that our vision won’t be aligned. We’re happy that you dream big, and this is why we funded you, but we also want to make sure that you don’t run out of money in your quest to fulfil your aspirations. We understand that you need to experiment, but you need to learn to be frugal and thoughtful when you do so – please treat our money as if it were your own!

You should provide information proactively rather than wait for your angel investors to ask for it. Your investors are usually more experienced than you, because they are older, and have seen more of life. They have backed other startups which have tackled the same kind of problems you’re dealing with, and may have useful insights to share – please make use of them. After all, two heads are better than one!

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You need to take ownership of your problems – we are not going to be able to spoon feed you or solve them for you. You do need to tell us what your problems are; what possible solutions you are exploring; and then invite feedback. Doing this on a regular basis is a great way of showing that you respect your investors.

This also helps to stroke their egos, and they are happy that you are reaching out to them, not just for money, but for advice as well. On a long-term basis, doing this regularly will make sure that your visions are aligned so that you can take them to where you want to go, rather than have to keep on arguing with them which can create a lot of unnecessary frustration for both of you.

Many entrepreneurs are worried that investors will start micromanaging them; or provide completely wacky solutions which they will not be able to implement. They are also scared that investors may get upset and irritated if they don’t listen to their advice. Yes, it’s true that angel investors come in all shapes and sizes, but don’t forget that most investors have their own lives to lead and after offering you a solution, they’re going to leave it up to you to decide whether to implement it or not. We respect your ability to make the right decision and are happy to support you, but you need to show us that you have thought through all the possible solutions systematically before acting.

We don’t like being blindsided by bad news which comes as a bolt from the blue, because you have not shared information. And we dislike being treated as puppets who are only asked to rubberstamp your decisions at the Board meeting.

While you can pull a fast one every once in a while by presenting us with a fait accompli, you will not be able to continue to get away with this behaviour on an ongoing basis, and it will come back to haunt you – especially when you need to raise more money.


[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/entrepreneurship/founders-startup-tunnel-vision-pitching/
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