Understanding your investors' perspectives can make it much easier--and more lucrative--to run a business together.
As a business grows, the interests of the investor and of the entrepreneur can easily diverge - especially if the two parties have different incentives that are not properly aligned.
Basically, the investor is always on a clock, with at least one eye toward the door. The investor’s job is ultimately to harvest returns for his or her own funds or investors. The investor knows that he or she will only have a small percentage of winners in an investment portfolio - some will be flat-out mistakes, some will be okay deals and some will be sideways deals that somehow hang on. So, when the investor sees a deal with real upside, they go for the gas. The goal is accelerated growth, sooner rather than later.
The entrepreneur, on the other hand, certainly wants to expand the business, but he or she is usually focused on reaching profitability first and then growing from there. The longer the business is losing money, the more likely the prospect that additional (dilutive) funding will be required. And until the business is making a profit, other traditional and less costly means of financing growth simply aren’t available. On top of this, the entrepreneur typically expects to be in the business for a much longer time than the investor.
Bottom line: The investor is looking for a salable asset (near-term exit) and the entrepreneur is looking for a self-sustaining and profitable business (long-term value).
Entrepreneurs Don't Understand “Business as Usual”
Every business encounters bumps in the road. But, as inevitable problems arise, the older and more experienced investors treat these things as business as usual: problems to be dealt with rather than major catastrophes that are about to kill the company.
In a real sense, they’ve seen this movie before. They’ve seen plenty of worse cases where some time, some planning and maybe a little luck got everyone through the storm in one piece. One of my favorite old-timers used to say that “things were hopeless, but not serious.”
It’s a completely different reality for the entrepreneur who’s going through the entire process for the first time. To him or her, every problem is unique, they’re all huge, and each one presents an existential threat to the business. While you might think this sounds a little extreme and over-wrought, it’s completely real for the entrepreneur and it results in three reactions, which actually can have very serious consequences. In a sense, the business can get killed - not by the disease or problem - but by the reactions and the “cures.”
In these cases, you can expect the following:
The entrepreneur quickly concludes that the investors (because they aren’t frantic) don’t care or aren’t interested in the business. This leads to ugly conversations and intemperate accusations. These aren’t helpful or constructive for anyone.
The entrepreneur is irresistibly drawn to action - to doing something, pretty much anything. Not because it’s the right thing to do or a well-thought-out solution, but because action itself is an antidote to the enormous anxiety that the entrepreneur is feeling. Predictably, this usually does more harm than good. As Yogi Berra used to say, “We may be on the wrong road, but at least we’re making good time.”
A loss of control. When you let everything become a crisis and be treated as an emergency, you lose control. You lose control not only of the agenda and of your scarce resources, but also of the ability to address and deal with the higher priority issues, which are far more critical. If unattended to, these are the issues that are going to sink your business.
Better an Unwanted Guest than a Broken Business
Sometimes the investor needs to be a bit of a bull in the china shop and barge in even if he’s not welcome. Denial is a powerful tool for entrepreneurs, but it can also be a big problem. It’s not a process where you can ignore the facts and try to make the circumstances fit the plan - all the parties have got to be willing and open to changing the plan. If you don’t think your business has any problems or room for improvement, then you probably have a big problem.
It’s been my experience that entrepreneurs pretty much never want to ask for help - a smart investor needs to invite himself to the party. Asking for help is embarrassing. But in many cases, the growth rate of a start-up is directly proportional to the entrepreneur’s tolerance for embarrassment. The thicker your skin, the further you’ll go.
HOWARD A. TULLMAN is the General Managing Partner of G2T3V, LLC – Investors in Disruptive Innovators and of Chicago High Tech Investors. He is the former Chairman and CEO of Tribeca Flashpoint Media Arts Academy. Over the last 40 years, he has founded more than a dozen high-tech companies. @tullman