Investor-Founder Relations: Insights from Check and 27 Years of Founding and Investing in Companies
My short career of 27 years has been divided almost equally as a founder of several startups and as an Angel investor. Although I have learned a lot as a founder from many of my seniors, I have learned even more as an investor from the founders that I have worked with.
One of the companies I chose to back very early was Check (formally known as PageOnce), and I had the privilege of working closely with its founders for seven years. When I reflect back on my journey with Check and CEO Guy Goldstein, I see many specific elements that helped me build a strong bond with the founders and allowed us to work together through good and tough times.
I’ve always believed that the relationship between early stage investors and founders is so important that in many instances it is the difference between succeeding and failing. But what are the key elements for a successful founder/investor relationship?
Just as building your company doesn’t happen overnight, it takes time to build trust. You wouldn’t pick a university without visiting the campus and speaking with students and professors. You wouldn’t choose a husband or wife without dating to grow comfortable with each other, and spending time with their family and friends.
A founder must spend time getting to know the investor, speaking with founders of the investor’s portfolio companies, and doing their own diligence to ensure that the investor can provide them with the resources they need to succeed. An investor must spend time getting to know the founder, speaking with the founder’s references and mutual connections, and speak to the founder’s customers to produce a more complete picture of the founder’s ability to build and sell their product.
The founder/investor relationship is a long-term contract with a no-termination clause. You can fire an employee, but you can’t fire your investor. Investors should invest in companies they believe in, feel passionate about, and support the company through advice and counsel, but the founders should be trusted to build and run their company!
There is a fine line between taking proper care of one’s investment by making decisions for the founder versus helping the entrepreneur take the proper steps towards building the company by outlining their decisions with them. An investor should act as the founder’s GPS navigation system: They can tell you when to turn, but they can’t drive the car for you. I want Waze to warn me before I take a 400 mile detour, but if I try to let Waze drive, I will probably crash. Striking the right balance between both sides of this thin line is delicate and complex. A founder should feel comfortable approaching their investors and asking for advice in the critical decisions they make, with full confidence that they will retain control over the company’s day-to-day decisions.
Although it is important that investors are treated as integral partners in the venture, and thus they must ethically be consulted for business matters, some of the important decisions must be left to be taken by the founders themselves. There were a few occasions in Check’s history that put the company at a ‘cross roads’ which would have taken the company into a different direction. Luckily, the final decision (after much deliberation between the founders and investors) was left for the founders to decide, (inevitably to the chagrin of some of the investors) and the outcome was very positive for everyone.
No one knows their company better than the founder, and any investor that tells you otherwise has trust issues.
The key to striking just the right chord between investors and founders is to keep the investors informed. This is especially true if the company is in the earlier stages of its development. Don’t be a selective communicator—tell me the good and the bad. If the founder only informs the investor of positive developments, the investor will be surprised (and confused) if the company is on the verge of closing down. In most cases, this communication is in the hands of the founders. They need to see their investors as partners and should give them some ability to participate in making important decisions, share their knowledge and experience. Investors should not feel left-out, surprised or excluded from the process. I believe that in many cases, such an arrangement makes avoiding mistakes much easier.
In the early days at Check an open line of communication was wide open between the founders and the early investors (often on a daily basis). This is why some of the most effective investor/founder relationships are nurtured through proximity—pick any of the hundreds of successful companies that we know and love today, and it is highly likely that their investor was in the same city or state. Communication and trust are best built through face-to-face meetings and an open line for phone calls, emails, and texts. Later on, when Check grew and so did the number of investors in the company, a detailed weekly update was emailed to the investors with all of the ‘ups and downs’ of all aspects of the business.
I often see founders who need to overcome their fear of losing control of their company. I advise them to remember the reason why they sought an investor to invest in their company in the first place. Despite the high-risk nature of the startup ecosystem, these investors saw something within the business model, believed in them as founders, chose to associate themselves with the company’s reputation, and committed to help build the company into something profitable for all parties. Making this commitment early is often easy, but the test to both parties can come later and may be subject to external forces.
When the high-tech markets were at a low in early 2009, the Check founders decided to take a ‘haircut’ on their compensation and hunker down to work through the rough times. This illustrated an enormous sacrifice and commitment on behalf of the founders, and I decided along with other angels to bridge the company until times got better. That event strengthened my personal relationship as an investor with Guy and the other Check founders. Moments like these that test the team’s character help to build healthy relationships that last a long time and enable founders to succeed in their current and future ventures.
Remember: there is a need to separate the business and personal relationships that are formed between investors and founders. There are times to sit down for a drink or have a special personal outing, and there are times to make tough decisions in a board meeting. Founders and investors that learn quickly how to separate these two will be better prepared to weather the storm together.
When investors and founders build trust, communications, and commitment, their chances of building a successful venture will vastly improve.