Most angel investors respect entrepreneurs. It’s because we think they are clever, that we are willing to invest money in their idea. We hope they will be able to grow their startup successfully, and that our money will multiply in the process. The respect and trust needs to be mutual, but every once in a while you come across an entrepreneur who causes you a lot of heart-burn after he’s taken your money.
Here’s a list of problems which I’ve encountered with entrepreneurs, and these serve as red flags the next time a founder comes to me for funding.
The major problem is that of arrogance. This is the entrepreneur who thinks he knows everything, and therefore sees no need to either tell you anything, or listen to anything you say. The reality is that he may be extremely smart, because he is an IIT- IIM gold-medalist, and knows a lot about the latest cool, cutting-edge technology, but no one can possibly know everything about everything !
Running a company is far more than just creating a clever widget – it needs a lot of additional skills , which is hopefully the additional value investors can bring to the table. However, he fails to realise the gaps in his knowledge, and is determined to blaze his own path, because he feels he is the next Steve Jobs.
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Then there is the entrepreneur who never bothers to communicate. He doesn’t tell you what’s happening at the startup, because he doesn’t want you to micromanage him. You have no clue about what’s going on, or what problems they’re running into. He treats the company as his personal fiefdom, and will share information grudgingly, based on what he feels you need to know ( which is precious little !) Every time you ask him for information, it seems like he’ s doing you a favor by sending you a few scraps. Trying to find out what’s going on is a painful process – a bit like extracting teeth !
The techie entrepreneur is so much in love with his own technology, his own product, and his cleverness, that he’s completely focused on this, to the exclusion of all else. Often he creates a very clever widget, but is never able to sell this, which means the company goes down the tubes once it runs out of the money you invested in them.
Some founders has all these traits in one toxic combination. This is the Mr. Know-it-all, who feels that once you’ve handed him the money, then it’s pretty much his decision as to what to do with it, because he’s the founder and the expert, and he really doesn’t need you anymore. The trouble is that he starts thinking of himself as being the next Steve Jobs, and feels you are too short-sighted because you cannot see the big picture! When things don’t go well, he refuses to take responsibility for his decisions; and is often happy to blame the investors for his failures, because they refuse to give him any more money!
The most dangerous founder is the one who is a cheat. He has the knack of being able to talk very sweetly, but keeps on pulling a fast one, time after time, until you realise he has been taking you for a ride. It can take a surprisingly long time for you to find out that his integrity leaves a lot to be desired, but by the time you do so, it’s too late for you to salvage your money.
Once an investor starts getting negative signals, this often spells the end of the company. If the trust and respect are no longer present, than the investor feels it’s not worth his time talking to the founder any more. If he feels that he’s not going to be able add any value, he’s quite likely to disengage, because he always has the option to spend his time and energy on the other startups he’s invested in, where the founders are more responsible and more responsive.
This ends up hurting both the company and the entrepreneur. When he runs into problems, he finds there is no one willing to back him; and when he needs to raise more money for his next round, he finds all funding has dried up. He’s used up al his goodwill, and his investors refuse to spend any more time or money on him anymore. This can be a tragic ending.
This is why people skills are so important for entrepreneurs. Clever founders need to focus on learning emotional intelligence, so they can manage themselves, their investors, and their company better.