Roles and Responsibilities of a Startup Investor
Updated: Jan 27, 2020
Being someone who loves to share my knowledge with newbies in the startup space, I frequently find myself doling out advice based on everything that I have learnt over the years. In doing so, I have found that funding and investment advice seem to be the most popular of the lot, with many takers queuing up to get the latest on how to crack the funding code! The existing columns on the internet seem to reflect this demand as well, with pundits and bloggers churning out article after article to help startup founders get funded, and investors make the right choices.
To be fair, I have also shared my own two cents in this regard, and tried to help out as many founders and investors as I possibly could:
However, as I was going through yet another investment advisory of late, I was struck with a bit of an epiphany. I realized that most of our discourse in this field is limited to chasing the investor and getting him to wire money to a startup's account. Alternatively, the pieces deal with landing the most lucrative deals and adding the snazziest of startups to investors' portfolios. While all of this is very useful indeed, nobody tells us what comes after.
Is wiring money the only thing an investor must do or do they follow some unspoken rules?
Any responsibilities that go beyond the transactional part of an investment?
Sadly, much of our investment advice is like the quintessential Bollywood movie that ends with the lovers meeting. We don't know what happens after, but a "happily ever after" is implied. The discerning audience, however, knows that there is no "happily ever after" without effort and responsibilities; and the same goes for an investor in a startup.
Once an investor takes a slice of equity from an innovative new company, and invests some money in it, he or she inevitably becomes a part of its journey.
While that journey may be fuelled in part by the investors' money, it needs much more than just that.
Since a startup is typically helmed by new entrants to the business world, an experienced investor can play a massively influential role in shaping the firm's trajectory.
With positive guidance, a startup can often move ahead of the curve, and build a strong business model on a sustainable foundation.
On the other hand, a reckless and irresponsible investor can have just the opposite effect: leading a firm to its ruins by encouraging a foolhardy race for growth.
Our recent history is peppered with instances where reckless counsel from investors drove promising unicorns to decline and devastation, and it is crucial for investors to uphold their unspoken roles and responsibilities to prevent similar ends for their investments.
Supporting the Founder's Vision
When an investor bets his/her money on a new business, it is reflective of their faith and confidence in the founders' vision. A startup, especially in its early stages, does not always have convincing statistics to back up its dreams and claims. It may have a decent proof of concept, a minimum viable product or a proof of market, but it is still typically unproven in the true heat of free market competition. In such a scenario, when an investor steps into the mix, it is crucial to give the due credit to the founders' vision. It is this vision which amply reflects the core ethos of the innovation, and must be allowed to flourish without any restrictive interference.
An investor is usually someone with adequate experience in the broader space, and it is only natural that one would want to steer the business in a direction that closely mirrors the investors' own vision. However, for an innovation to take flight and one's investment to bear fruits, it is crucial to strike a balance between the wisdom that comes with experience, and the creative vision espoused by a founder. Responsible investors must, therefore, look beyond their belief in the tried-and-tested and support founders to a reasonable degree. They should guide and advise the founders they are backing, but never smother them. Such micromanaging will not only derail the firm, but will potentially take away from the investors' own returns as well.
Thus, supporting the founder and giving them the right kind of guidance without being too overbearing, is one of the principal responsibilities of an investor looking to go beyond a mere transactional relationship.
Fund Management Advice
Perhaps one of the most notable cautionary tales of the startup space from recent times is that of WeWork, and how it collapsed in the face of heedless expansion and exorbitant valuations attained in private funding rounds. Backed by SoftBank and others, this unicorn found itself stumbling on the threshold of the public market, despite having commanded a heavy price in the private equity space so far. Interestingly, many of SoftBank's investments have suffered similar fates over the years, leading us to wonder how much guidance and advice from investors can shape the financial health of a startup.
Many startups today are a victim of the "greater fool theory", where their investors continue to drive their valuation up, thinking that the next investor who comes along will surely be the "greater fool" and cough up a higher sum. While this may look great on paper, it often leads to poor fund management, an unsustainable plan for growth and overall financial haemorrhage. In such scenarios, startups begin to lose obscene amounts of money, just because they can!
As I see it, as responsible and experienced members of the business community, it is crucial for investors to guide the startups they back, in adopting a more sustainable approach for fund management. Instead of callously driving up the valuation, it is important for them to take a more prudent path and give better counsel to the founders who work with them. Even though hiking up the valuation to insane levels can benefit an investor in the short run, it doesn't do much for their ability to build businesses in the long run. They are an integral part of a startup's growth story, and their responsible contribution is imperative for its long term success.
Creating Goodwill For Companies
The moment an investor decides to come on board by putting money in a startup, they essentially become one of its owners. They have actual stake in the business, and their actions and decisions in the market begin to reflect on the startups in their portfolio. Being brand new, such startups are particularly susceptible to the reputation of their investors, and the latter's discipline and credibility in associated dealings tend to reflect on the goodwill of the business as well.
Therefore, one of the most important aspects of an investor's role is to uphold and in fact, expand, the goodwill of their investments. This not only benefits the firm that they have joined as an owner, but also ends up contributing to their own earnings from the same.
Helping the startups build networks and reach out to established players in the market is also an important part of this responsibility, as startups often depend on their well-connected backers to help them connect with more influential entities in the space.
This is another of the basic roles of a startup investor that goes without saying. Startup investors frequently receive pitch decks and financial data from many new firms that are hoping to get funded, and it is absolutely crucial that the investors handle all such information in good faith.
Maintaining confidentiality, and refraining from sharing these details even with companies that already work with him/her, is an important aspect of an investor being responsible and credible.
Besides, investors must also remain constantly mindful of the products and services they already back via their investments. In that vein, they must be extremely careful to sign on competing brands, or any business that may represent a conflict of interest.
This will help prevent both legal and ethical issues and allow the investor to deal with his/her existing investments in the fairest way possible.
Clearly, there is a lot that investors in startups need to do.
While they don't need to handhold startups through their arduous uphill climb, they do need to do their very best to alleviate their struggles and lend a helping hand. Breeding goodwill, having the founders' backs and maintaining ethics and integrity are all just as important as funding a company, and constitute the major roles and responsibilities of startup investors.