Should Founders And Funders Become Friends?

As an angel investor, the reason I invest in a startup is because I believe in the founder. I feel that he has a product which can solve a paying customer’s pinpoints, which is why I hope he will make me a lot of money in the process of running his startup.

During my due diligence, I am quite likely to establish an emotional connection, and I try to be an observer on the Board, so I can continue to learn from him. This means that as an angel, I will have a personal relationship with him, which goes over and beyond our business relationship.

The question is – is it a good idea to become friends with the founders you fund?

This can sometimes backfire. If the entrepreneur thinks of you as a buddy, he may not take your advice seriously. In sharp contrast, he may treat a VC’s feedback with much more respect, because VCs have more gravitas, and are more professional.

Finding Balance Is Key

It can be difficult to find the right balance. After all, one of the reasons I invest in startups is because I want to connect with the founders. I want to be a part of their success story, so I can help them to create something which would otherwise not have existed. This is completely unlike public market investing, which is a completely soulless enterprise, because all you look at is the numbers.

It can be hard to wear two hats at the same time. You want to be a friend, philosopher and guide – but you also need to make sure that the founder doesn’t run the company to the ground. You need to ensure that he is focussed on generating revenue and being profitable, and doesn’t get distracted by falling in love with his product.

While having an emotional connection helps to create goodwill, it can also mean that you may find it hard to criticise, even when this is called for. You may be reluctant to pull up the founder,

Because you think of him as a friend. Sometimes, the founder may not even realise that you have put on your investor hat when you are talking to him, because he thinks of you as a friend! He ends up ignoring everything you say, which can sometimes get extremely frustrating.

When A Funder Has To Be A Funder

While a healthy personal relationship is important, it is equally important that the founder realise that your job as an investor is to make sure he’s meeting his targets and not running out of cash.

He can’t afford to lose sight of that just because you happen to be a friend – and this is one of the reasons why family and friends are often considered to be fools when they invest in a startup!

You need to create a mix of both a convivial relationship which also has a long-term focus on profitability, so that the company continues to grow. This can be quite tricky when you have co-investors. They may feel that you’re being too wishy-washy; and that you are a softy who allows the founder to walk all over you.

This is why establishing a relationship based on trust is so important, so that you can provide tough love to the founder when it is required.

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

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.