3 Ways to Avoid a Power-Hungry Investor
The investor-entrepreneur relationship is like a marriage--if you wed the wrong partner, things will almost certainly end badly.
There are lots of ways to define the wrong investor relationship. Nir Eyal, a start-up veteran and the author of the forthcoming book "Hooked: How to Drive Engagement By Creating User Habits," offers one particularly difficult kind in the Harvard Business Review: when a venture capitalist wields his power over a founder, inflicting self-doubt, poor performance, and even failure.
If your start-up receives venture capital from a controlling investor, things can get difficult if your company doesn't hit early milestones. "The investor's doubts in the founder begin to show through subtle cues like body language and tone, as well as in not-so-subtle ways like sending emails asking for more frequent progress reports," Eyal writes. "The investor may also initiate lengthy discussions, wanting to know how the company intends to get itself back on track."
That criticism and suffocating supervision can quickly turn disastrous, chipping away at a rookie entrepreneur's confidence. "The CEO's self-doubt fuels poor performance, validating the investor's suspicions and throwing the company into a self-perpetuating death-spiral, which leaves the once-promising CEO dazed, confused, and often times, out of work," he writes.
Want to avoid the kind of relationship that can lead to the death spiral? Here are Eyal's suggestions:
Set up the relationship to succeed.
Before a deal is made, agree on how supervision will be carried out. Accepting capital cannot give the investor absolute power over you, your decisions, and the company. "Companies that institutionalize regular dialogues between hierarchies can head-off [problems] before [they get] out of control," he writes. "A similar practice can help CEOs and investors get along."
Adopt the right mindset.
It's important to adopt the correct perspective in an investor relationship. Remember that no matter what the investor says, he or she wants the company to thrive--you're both on the same team. Let this guide your view of the situation. "If the perception of disappointing an investor is getting in the way of guiding the company, the entrepreneur must choose another point of view," he writes. "Founders must ward-off the demons of self-doubt by never interpreting investors' actions as, 'You are failing,' but rather, 'I want us to succeed.'"
Look for the humble investor.
When you start the fundraising process, make it a priority to find someone who's humble and will support you as you do your job. "The best angels remain faithful in the face of uncertainty and help CEOs rise to the challenge," he writes. "They imbibe founders with an omnipotent sense that they can do anything. In short, real angel investors make founders feel like gods."