Three reasons why entrepreneurs are sacked by investors
Friday, October 26, 2007/
Why do so many entrepreneurs who successfully raise capital for their business end up being booted out? Here’s why…
Last week I mentioned that the founders of about 50% of early stage companies that actually succeed and raise venture capital will be out of the business in 12 months. And not necessarily on his/her own terms.
How does that make you feel? A bit scary, isn’t it?
In previous blogs I’ve mentioned that, at most, only 2% of entrepreneurs are successful at raising venture capital. So, you’ve done a massive amount of work, you’ve convinced these hard-nosed investors to write you a cheque, you’ve made huge sacrifices in terms of time and effort – only to be evicted after just 12 months.
This is devastating. How does that happen?
Well, let’s look at the reasons why so many entrepreneurs who raise capital end up out of the company…
#1 Not prepared to ‘let go’
All companies go through different stages of development. Each stage brings with it different types of challenges.
When a couple of entrepreneurs get together and start a company, it’s a big risk. The main issues are product development, market entry and cash flow. And, because it’s generally a small team, you move quickly, changing plans as needed by the market and to maintain cash flow.
When the company is into the market, there are more staff and they need a more structured approach. Plans can’t change in the blink of an eye because it affects too many people. Systems need to be in place and staff need to feel comfortable that they have clear direction.
The person needed for an opportunistic, fast moving entrepreneurial company is quite different from the person needed to develop systems, develop clear plans and keep the machine running.
Human nature can often cloud our judgement when making these very emotional decisions. Many entrepreneurs try to hang on too long.
Let go. It will be less frustrating and much more fun. And you get the chance to do it all over again.
#2 The chemistry doesn’t work
In other words you “butt heads” with the investors. You need to be able to “get on” with them. If you decide to accept equity investors then you MUST listen to them and respect their opinions. They want to be involved. It’s not just about the money. They want to work with you to build the business.
If you don’t get on, then you will be evicted. You can be sure that the investors won’t pack up and leave. They will make sure of that in the paperwork that you sign when you accept their cheque.
Whatever you do, don’t accept equity investment from investors that you are not 100% comfortable with. If you do, it will all end in tears. That’s YOUR TEARS.
#3 You don’t share the same goals
In the early stages of any business, you’re never sure what direction you will finally follow. Sure, you write plans, you discuss market conditions with your team, but stuff happens. You may need to change direction.
When you reach this point, and the investors have a strong view on the next best option and you don’t see it their way, then you will end up in the divorce court.
The key here is to listen and to be flexible. The investors are your partners. They have a very good understanding of your business. Well, it’s actually their business as well. That is sometimes hard for a founding entrepreneur to understand. But it’s reality.
From here on forward, the decision is made after an in-depth discussion with the investors. And it’s not just an exercise in listening to their advice and going off to make a decision. It will be a joint decision made in accordance with the rules of the board.
I hope that this gives you a better understanding of why 50% of entrepreneurs depart after just 12 months of receiving equity investment.
For the next blog…
I’ll look in more detail at deal flow to give you a much better understanding of what happens when a venture capital firm is approached to invest.
Till next time.
To read more Gail Geronimos blogs, click here.