Your Investors Aren’t Your Friends
When you’re first starting your own business, lining up investors seems like the most important thing in the world. After all, without capital you’ll have no way to implement all your great ideas or scale up your startup. Once you do manage to land your first investors, then, you’re usually pretty grateful and eager to cultivate and nurture the relationship — not just out of gratitude, but also in the hope of landing further investments as your company grows.
Of course, it’s important to stay on friendly terms with your investors. But as someone who’s sat on both sides of the table — building more than a dozen businesses as a founder, then steering multiple startups to successful exits through my investment company — I believe that one of the most common mistakes that founders make is to assume that investors’ interests automatically align with their own.
The reality is that while your investors are enormously important, they aren’t your friends. Here are three reasons why it can pay to keep your investors at arm’s length while you grow your business.
3 Reasons Why Your Investors Aren’t Your Friends
- Investors aren’t experts.
- Investors aim too high.
- Investors spook acquirers.
1. Investors Aren’t Experts
The first and biggest thing that you need to realize is that the overwhelming majority of investors have never actually built a business of their own. Sure, they probably have an MBA and a bunch of strong opinions, and some experience shepherding other founders, but many have limited experience with sitting in the driver’s seat, using their own money and having their employees’ well-being on the line. That doesn’t make your investors’ views worthless. But it’s important to understand what their perspective is grounded in, and not to assume automatically that they’re experts in the nitty-gritty of building a business.
This is especially challenging for first-time founders, who typically feel pretty out of their depth when they’re starting out, and desperately want someone to tell them the right steps to take. But it’s important not to see your investors’ thoughts as the final word in the matter. By all means listen politely to what they have to say — but talk to other people, too, and try to find mentors who have real, first-hand experience growing successful businesses in your specific industry.
2. Investors Aim Too High
It’s also important to realize that while your investors definitely want you to succeed, their definition of success might not be the same as yours. Essentially, your investors are playing a longer game spread across multiple different startups that they’re backing. They need to generate a strong return across their whole portfolio — but they aren’t going to lose their shirts if any single company within their portfolio fails.
That means investors have a higher tolerance for risk than founders, and a greater appetite for strategies that promise to generate plus-sized returns. An investor will often prefer to flip a coin in the hope of netting a 100X return than to accept a low-risk play that will generate a near-certain 5X or 10X return. That makes sense if you’re flipping lots of coins, but as a founder you only get one stab at this. You might well decide that it’s in your interest to forgo the chance of building a unicorn and aim for a more realistic strategy that will get you to a quick exit.
3. Investors Spook Acquirers
Finally, investors have a nasty habit of tripping up founders as they near the finish line, by wading into exit negotiations and spooking acquirers. I saw this play out at one of my own companies: I’d found a promising potential acquirer, but made the mistake of letting my investors find out about the early-stage discussions. They jumped on the phone with the acquirer and proceeded to deliver the strongest possible pitch for my business, hoping to jack up the eventual acquisition price.
That might not sound so bad, but it meant that when the acquirer began their process of due diligence, they were set up for disappointment when they inevitably found aspects of my business that didn’t perfectly align with their needs. If I’d been able to manage expectations, I’d have been able to surface those aspects early on, then ensure the acquirer gradually got more excited as they learned more and more about my company. Because I let the investors join the process, though, the acquirer wound up backing out and I lost a potentially lucrative exit.
The Buck Stops With You
The bottom line here is that your investors have the ability to write checks that will help you grow your business — but they aren’t your friends, and they don’t necessarily know more than you do about how best to achieve a successful exit. For startup founders, the key to navigating investor relations is to overcome your imposter syndrome, and realize that no matter how big the checks they’re writing, your investors aren’t in charge of your business, and they aren’t your mentors either. Their opinions do matter, but they always have their own agenda that has some overlap with but doesn’t completely align with your own interests.
As you grow into your role as a business leader, you’ll learn that ultimately the buck stops with you. Nobody else has as much skin in the game, and nobody else is putting as much sweat equity into your business. That means you have to take responsibility for growing your business in a way that will yield good results — for your investors, yes, but also for your employees, and for you personally. To succeed, you’ll need the confidence to accept your investors’ checks, listen to their advice — and then chart your own path forward, according to your own best judgment and your own vision for your growing business.