One of the key ingredients in a startup is trust. There needs to be trust between the co-founders; trust between the founders and the employees; trust between the customers and the company; and trust between the investors and the entrepreneurs. Thus, a founder needs to trust that when a funder says they will write them a check, they will do so. Similarly, the investor needs to trust that the founders will be open and transparent; and will proactively share information with them so that they know what’s happening.
The problem is that this trust is often taken for granted. Keeping it alive often becomes a low priority for entrepreneurs, because there are so many different things they have to juggle. Sadly, providing regular updates to the investors, having board meetings and regular calls, sharing an MIS becomes a low priority for them.
This lack of discipline can create major problems. This sloppiness often means that the entrepreneur will not get in touch with investors until they find out one fine day that they’re running out of cash. They then start getting desperate and asking for more money. This is precisely the time when investors will refuse to write any more checks because they are upset and feel you have hidden the truth from them.
Actions have consequences and trust begets trust. If you treat your investors purely as a source of funds, they will no longer be willing to trust you with any more of their money, because you’ve let them down. Because trust is so fragile and can die so easily, entrepreneurs need to devote a lot of time and of energy on making sure they are trustworthy.
If the investor doesn’t trust you, this doesn’t mean he thinks you are a crook and that you have siphoned money – it just means that he can’t trust you to run the business properly, and will look for better avenues to deploy his money.
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]