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March 17, 2011

Managing Your Investors

By: thejunctioncoil

Married with ChildrenTaking an investment is getting into a long-term committed relationship, which like any other relationship needs to be cultivated, nurtured and managed. Funny enough, many of the entrepreneurs I meet have this perception of investors coming in and taking over their companies, with the founders losing control through the investors getting veto rights. The reality of it is that the company founders and management are much more informed about the day-to-day and are so much in control, that there is a whole area of studies around the “Principle-Agent Problem”.

One key point even before managing your investors is selecting them. I particularly like this list as a sanity check for an entrepreneur talking to a VC. Much like any relationship, you need two to tango, and startup life is hard enough without being stuck with, well, an asshole investor.

I am writing this more of a sanity check for me and as a note to companies that I work with. Hope someone else finds it useful, but YMMV.

Many of the following “how not to” indicators should be warning signs for early stage startups. Not “run to the hills” signs, but definitely pointers that something is wrong with the relationship:

  • Demand for constant updates: A typical scenario is getting a call from your investor complaining that they are out of the loop and feel that once you got their money, you don’t call or write. Generally, this is exactly the investor that doesn’t provide you with enough value that you feel you should keep him up to date.
  • Waiting for board meetings to “discuss” status: This is the other extreme, where either because of lack of capacity or desire, they don’t keep an on-going communication channel with you. The risk here is twofold: they are likely to be surprised with the board presentation, or worse off, will be less dependable to help the company when things go out of whack. And they will, they always do.
  • Too active of an investor: You know how is it like. Your investor made an introduction for some reason, and now the overhead is on you. Or, crisis mode introduction to a VP of Marketing of whateveryoucallit.com because there was a slide about viral distribution in the last board slide deck. In hebrew we call it “full gas in neutral”, I wonder what’s the english comparable.
  • Raising hell the first time you don’t meet predictions: Shit will hit the fan, be at at the first board meeting when the investor becomes an insider and starts grasping the nitty gritty of the business, the second board where it became apparent that shorting on your Q results predictions would be a sound investment strategy or if you just don’t get along well.

The reality is that an investor has one primary “stick”, which is replacing the CEO. When the CEO is the founder, who is (at least in my mind) the heart and soul of the company, this can be disastrous.

You need to realize the basic issue is information asymmetry. It’s not (I hope) that your investor is looking to nag, be shallow, take over your precious time or harm the company, many times it’s them feeling out of control and not having access all the information. The easiest way out of this is keeping a proactive communication channel with them, and defining very clearly what is expected of you and them. Notice yet another similarity to marriage?

So, how could you empower your investor to be more helpful, or in other words, how I would like to be managed by you:

  • Expose KPIs (all the time!): The hardest part about exposing KPIs is defining them. What are the key performance indicators you’d like to judge where you company is at? An example for a consumer product could be: # of users that joined last week, % retention, average acquisition costs and average life-time value per user. For an enterprise sales company it would be average deal value, duration of POC, % of close. Email these in a tabular format that includes past weeks results, say what are your thoughts about the change and whether you are changing anything as a result. Be transparent.
  • Tell them what you need (and what you don’t): I ask companies for my top-3 goals for that company every month. What should I be working on? Hiring, Intellectual Property, Monetization? This way I know what’s expected of me and you know that I won’t bombard you with things you don’t need. Understand your investors deeply. Do your homework so when you need something you know which ones to go to when you need something done for you. Don’t blast out emails to everyone you’ll end up the spammy entrepreneur and people will start to ignore you.
  • Don’t wait for board meetings to meet and consult: Doing the day-to-day execution is demanding, but find the 10-15 minutes to call, ask what’s up, tell them the latest good & bad. You’d be surprised, sometimes just a good sounding board can make all the difference in that lonely life called being a CEO.
  • Forward focus: When in board meetings, don’t spend more than 20% of the time reviewing the past. The rest should be devoted to how (if required) you are going to change what needs to be changed and what goals do you want to achieve moving forward. Plan your execution and execute your plan. Many founders do the opposite split in feeling they need to “present” to their board.
  • Be direct, don’t be optimistic, or “manage expectations”. Tell it like it is. Treat it as a partnership, exposing good & bad so you can both put your thinking cap on and work through issues. The worst thing that can happen is having a positive outlook (remember, this is what they updated their partners with!) while issues start cropping, only to realize you are running out of cash in a couple of weeks (true story).  Ben Horowitz had a great post about this: CEOs Should Tell It Like It Is

Taking an investment is getting into a long-term committed relationship. Most important point is that it’s ok to ask for help – no one does it alone. Always make sure one of your investors is a person who you can call at 3am if you just need someone to chat when you’re at your lowest. startups are hard! You can’t always be friends with them, but it’s a long ride, might as well do it with someone you like.

Thanks to @mporat, @prasanna, @birsch, @rongura, @oroffer and Yair Shoham for reading drafts of this.

4 Comments

  1. [...] Managing Your Investors [...]

  2. eden

    18/03/2011

    Edited following comments by Yair Shoham, my partner. Transparency is key and selecting your investor is even more so, before managing them. Thanks, Yair!

  3. ophirk

    18/03/2011

    “Selecting” a partner is far from trivial. In many cases the partner that you would approach is not the one who will end up in your board. In that sense “Selecting’ a VC is more important, in the long run.

    I’m missing “Integrity” as key selection criteria for funding. It is much better to work with people you can trust. A great question for me is “would I hire this person for my company?” A negative answer is not enough to rule out someone, but a positive one is great hint.

    Expectations from investors operational contribution should be very low. Their #1 job is to get you the funding and after that your role is on execution and their role is to find the next investment. Assuming they can significantly help the founder is pretty much unrealistic, although there are exceptions .

    I do think that finding an investor who understands your product and market can be a great contribution. However, from my short experience, out of ~70 investors that checked our product, only 1 (in words – one) ever logged into the application :)

  4. eden

    18/03/2011

    Ophir – in my mind the partner you should approach *is* the one you want on your board. If you do your homework right, this should also be the partner that has the most chance to be excited about your deal. In case a different one ended up owning the deal, do your DD on him/her.

    Couldn’t agree more about your comment re: Integrity. I didn’t start the post with VC selection criteria in mind.

    What I disagree is regarding the expectations. Though as an entrepreneur I always said that my expectations of a good VC is one that doesn’t disturb me while I work, what I’ve learned since is that there is a way to get more out of an investor, at least there is a way to get more out of me :-)

    I would 10000% NOT take (early stage!!!) money from an investor that hasn’t logged into my product.

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