Founders: Get Those Skeletons Out of the Closet!
BY Scott Maxwell
No company is perfect. And your investors are going to discover your imperfections sooner or later. Here's why you should beat them to it.
Everyone has a body feature, quirky trait, or embarrassing life event that they’re uncomfortable sharing. We typically do everything we can to bury or mask those imperfections.
Founders often do the same thing with their companies.
Maybe there’s a bug in the company’s software that could squash its credibility or security, or maybe the company’s customer retention metrics are underwhelming. Entrepreneurs are understandably sensitive about these issues. When they meet with potential investors, they often try to bury them deep in their proverbial closets.
Here’s the problem with that way of thinking: Partnering with a venture backer is like getting married. You've heard that before. Now think about what it means.
If your relationship is built on transparency and trust, you will likely forge a successful, long-lasting partnership. If it’s built on lies and half-truths, then you're going to have to deal with consequences that are much more damning than the skeletons you were trying to hide.
Why Revealing Your Issues Can Help Your Business Prosper
Yes, I’m the founder of a venture capital firm. So of course I’m going to advise you to reveal your darkest secrets to venture investors before you sign a term sheet.
Here are two big reasons that doing so is in your own best interests:
1. Your skeletons might not be skeletons Often entrepreneurs are overly sensitive about their company’s shortcomings, and they view their problems as deal breakers. Sometimes, however, those issues are really just minor imperfections. By revealing your skeletons to potential investors, you at least give yourself the chance to assess the severity of your issues.
2. You can tap into a well of expertise and insight Many VCs have begun to offer consulting services that are designed to help their portfolio companies solve key operational and strategic issues. You might discover that your investor knows exactly how to address the challenges you are facing.
Of course, some VCs might also end their conversation with you the moment you bring up any sort of imperfection. That isn’t always a bad thing. As a smaller, growing company, your goal should be to find an investment partner that is willing to grow with you and help you manage the many obstacles of scale. If an investor immediately dismisses you because of your skeletons, they probably weren’t a good fit for your business anyway.
The Right (and Wrong) Time to Reveal Skeletons
Admitting that you have skeletons in your closet is a big step toward a stronger investment partnership. But at what point should you reveal those issues to investors, and how should you go about it?
My advice would be to bring potential deal-breaking issues up earlier in the investor-company courtship, and to do it in the most transparent way possible. The last thing you want to do is waste anyone’s time or make it look like you were trying to hide or minimize a major issue.
On the other hand, if you think an issue is relatively minor and might unnecessarily distract an investor from the truly appealing things about your business, then it may be best to withhold that information until later in the engagement.
Here’s the bottom line, though: As Louis Brandeis once remarked, sunlight is the best disinfectant.
If you’re going to bed at night worrying about the things you are hiding, then you won’t be able to confidently lead your business. Even worse, the longer you ignore your issues, the more likely it is that they will fester into fatal flaws that aren’t so easily cured. When your investor discovers the issues (and he or she will), it is going to damage your relationship and your reputation.
SCOTT MAXWELL has worked in venture capital since 2000. In 2006, he founded OpenView Venture Partners, focusing on expansion-stage tech companies. He graduated from MIT with a Ph.D. in engineering and an M.S. in management. @scottsnews