Setting Boundaries

Getting investors on board is vital for any business to succeed. But founders should remain in the driving seat.

By Nader Museitif

From weak product or service design, to pricing or strong competition, businesses can fail for many reasons. Some reasons are even out of a founder’s control when, for example, they’re forced to contend with harsh political or regulatory environments that make it hard for the product or service to thrive and grow.

But it doesn’t take much investigation to highlight a seldom-discussed yet critical factor for business success: investors.

Investors are by definition experienced in building businesses and effective in employing their much needed funds into cash-hungry startups. Entrepreneurs rejoice once they secure a round of funding and pride themselves on having this investor or that one on their board. And as soon as an investor is in, expectations begin running high on the value the investor could conceivably bring to the founding team in terms of  mentorship, networking, and know-how. For all these reasons, investors are usually ranked at top of the food chain.

But it’s often not a rosy picture with startups, and not enough attention is given to the counter-productive effect the wrong investor or group of investors will bring to a boardroom.

In the same way that a business undergoes different stages in its life cycle, the composition and input of investors should change to reflect that development. A classic scenario starts the business with angel and VC investors during its startup phase. These funders are usually hands-on and are continuously supportive of the founders. Same or similar-type investors may carry out several rounds of funding until the business is past its initial risky stage and into growth territory. That’s when the business becomes attractive to more institutional or trade investors looking for controlled risk and willing to add value. The classic investment cycle often progresses to an IPO or a private equity sale in which investors cash out and allow public markets and founders (or managers) to take the company to the next level.

As the initial stage is the riskiest for a startup, the type of investors and their mix can be extremely detrimental. Founders looking for investors should be sure of several factors: Are the investors aligned to the founders’ vision and strategy? Are their skills and backgrounds complementary to the management team’s work? Is the board meeting a peacock show or is everyone focusing on the future of the business?

In the same sense, the onus falls overwhelmingly on founders to make sure that investors are well selected and well managed. Investors shouldn’t be placed at the top of the food chain from day one. This may happen in later stages, and even then the whole notion of shareholders being a priority is disputed. Founders should be strong and remain empowered, along with their team.

Investors are important, but they’re not there to run the show. They are there to fund and support, not to buy and control. A founder wanting everyone involved in their business in order to succeed will keep this philosophy in mind when deciding how to run their teams and draft their term sheets.