Success in the start-up world gives you money, but also gives you equity investors with many demands. That sort of success may not actually give much freedom unless you manage to sell out, literally, in the form of trading your equity and control for cash. Then the investors become someone else’s problem and you’re left with cash and freedom.
I don’t know the start-up world that well, but one founder has told me that he’s never had investors bug him about anything. Do you think it’s typical for investors to bug founders?
I’ve been in five or six startups, depending how you count. If the startup is not meeting the investors’ expectations and needs more cash, which is usual (nearly all startups fail), then keeping investors happy is a huge problem.* The first six months or so of an investor relationship are usually okay, but things sour from there. If you’re exceeding expectations they’re pretty mellow, I hear, but their expectations are pretty extreme and I have no direct experience of this.
*Oddly, people become unhappy when they realize you’re losing their money.
Hmmm. For the record, the founder I mentioned had been “losing their money” for years, and had been thru multiple rounds of fundraising. And yet never had an experience like yours. (This person recently became profitable, tho, so that phase is over.)
What leverage does an investor have, that you have to work hard to keep them happy?
In the companies I worked for, the major investors usually had a few seats on the Board of Directors. Also, they generally invested because they were major potential customers and hoped to use the startup’s technology as a competitive advantage in their own companies. And the investment contracts had many strings attached to preserve the investor’s flexibility at the cost of the startup’s. So they could (and did) renegotiate research agreements under unfavorable terms when the startup couldn’t deliver as promised, trigger contractual provisions that gave them extra control if revenue targets weren’t met, lead boardroom motions to replace senior management, send their people around to monitor the workplace (board members have that right), etc.
Or they’d just shut off the funding. A startup that has investment will almost always add staff and other costs; that’s why they wanted funding in the first place. But that means that the burn rate rises to the point where the company can’t survive long without more cash*, and its current investors are by far the easiest people to tap for cash. When they cut off the spigot, several of my employers weren’t able to survive long enough to find more funding.
*It would be nice to get several years worth of cash at once, but most investors were unwilling to commit more than six months at a time. Maybe a year, at the outset.
Success in the start-up world gives you money, but also gives you equity investors with many demands. That sort of success may not actually give much freedom unless you manage to sell out, literally, in the form of trading your equity and control for cash. Then the investors become someone else’s problem and you’re left with cash and freedom.
I don’t know the start-up world that well, but one founder has told me that he’s never had investors bug him about anything. Do you think it’s typical for investors to bug founders?
I’ve been in five or six startups, depending how you count. If the startup is not meeting the investors’ expectations and needs more cash, which is usual (nearly all startups fail), then keeping investors happy is a huge problem.* The first six months or so of an investor relationship are usually okay, but things sour from there. If you’re exceeding expectations they’re pretty mellow, I hear, but their expectations are pretty extreme and I have no direct experience of this.
*Oddly, people become unhappy when they realize you’re losing their money.
Hmmm. For the record, the founder I mentioned had been “losing their money” for years, and had been thru multiple rounds of fundraising. And yet never had an experience like yours. (This person recently became profitable, tho, so that phase is over.)
What leverage does an investor have, that you have to work hard to keep them happy?
In the companies I worked for, the major investors usually had a few seats on the Board of Directors. Also, they generally invested because they were major potential customers and hoped to use the startup’s technology as a competitive advantage in their own companies. And the investment contracts had many strings attached to preserve the investor’s flexibility at the cost of the startup’s. So they could (and did) renegotiate research agreements under unfavorable terms when the startup couldn’t deliver as promised, trigger contractual provisions that gave them extra control if revenue targets weren’t met, lead boardroom motions to replace senior management, send their people around to monitor the workplace (board members have that right), etc.
Or they’d just shut off the funding. A startup that has investment will almost always add staff and other costs; that’s why they wanted funding in the first place. But that means that the burn rate rises to the point where the company can’t survive long without more cash*, and its current investors are by far the easiest people to tap for cash. When they cut off the spigot, several of my employers weren’t able to survive long enough to find more funding.
*It would be nice to get several years worth of cash at once, but most investors were unwilling to commit more than six months at a time. Maybe a year, at the outset.