Time For A Reset Of The Founder-Investors Relationship Model
There’ve been observations for some time about bad behavior from startups. But it’s clear from a recent article in Forbes, The Ugly Unethical Underside of Silicon Valley, that the entrepreneurs aren’t in it alone:
“Even when truth-stretching founders get caught, early-stage investors may look the other way.” Dave McClure, founding partner of venture fund and accelerator 500 Startups, says misrepresentations don’t always preclude his firm from investing. “You might even find a correlation between ‘interesting’ behavior and successful entrepreneurship,” he says.
Huh? VCs tolerating — even glamorizing and encouraging — the truth-stretching entrepreneur as “lovable rogue?” That kind of misguided, adolescent urge should have no place in the serious business of vetting companies asking for other people’s money to bring goods and services into the stream of commerce.
“So inexperienced people are handed giant piles of money and told to flout traditions, break rules, and employ magical thinking. What could possibly go wrong? “We hope that entrepreneurs bend the rules but don’t break them,” McClure says. “You know the saying ‘There’s a fine line between genius and insanity’? There’s probably a fine line between entrepreneurship and criminality.”
A fine line? Really? Doesn’t lawful but shady behavior — rules bent, though not broken — hurt everyone about as badly? Arguing in post-mortems about whether or not a founder’s assurances constituted real fraud or just naive exuberance and careless business practices won’t bring back the true losses sustained by founders, investors, employees and customers — the people who put their faith in the new venture.
Founders and investors in the new economy should get on the same side of the table, not to collude to foster exaggeration and wishful thinking, but to address head-on three serious problems in the startup culture:
Confusing healthy willingness to look beyond traditional conventions with careless disregard for good business rigor, processes and procedures, internal challenging and oversight
Typically, founders and the key people at the helm are technical wizards with little business or management experience. It’s unfair to all parties to take them “at their word” when they are describing sales, marketing, operations, administration and financial models they have neither the education nor experience to truly understand.
These companies usually don’t have the processes and procedures of the more mature and established companies whose markets they’re cheerfully disrupting and whose behavior they ridicule as bureaucratic and sluggish. But they could benefit from some of the good business practices that kind of infrastructure can enable. See our article If You’re Serious About Growth, You’ll Need These 6 Big-Company Tools.
The sophomoric elevation of mere steps in the business process to the status of victories in themselves
Somehow it’s become accepted dogma that getting a round of funding is “winning” and cause for celebration, and that “clicks” and “sign-ups” equal “growth” of a business. This kind of childish exaggeration of accomplishment is laughably comparable to school competitions where every kid gets a prize just for showing up.
Founders’ raising the victory flag upon the happening of these events triggers a misguided impression among the cheering section that some real value-creating event has occurred and that it’s appropriate to join in the celebration. Nobody wants to be a party-pooper and point out that these are but preliminary or intermediate steps every business must take, soberly and without fanfare. (Imagine the proprietor of a main-street business emerging from a meeting at the local bank, throwing a party to celebrate having just signed his name to yet another business loan!)
Sure, you need funding and getting customers to try your product is critical. But reported milestones should be those generally accepted in the larger business community as evidence of real progress rather than ones specially made-up for the “game of start-up.”
Brushing off the serious consequences of total failure as a “learning experience” with no victims
Everyone loses when a startup fails. It’s not just the investors’ money. It’s people who put their trust in the founders, employees, customers, other businesses with whom the company had strategic alliances.
A little regret and remorse can be powerful incentives to do the right things in the right way, even when it’s painful and expensive.
If VCs really want to help new ventures, they should do more than sit and listen and give a thumbs up or thumbs down to handing over a bunch of investors’ money. They owe it to the founders and investors as well as the employees and customers, present and future, to bring to the table solid business judgment and implement good oversight processes, to kick the tires with proper inquiry during initial presentations and stay engaged relentlessly all along the way to real profitability and business maturity.
See our recent article Read This Before You Invest In A Startup Or New Venture.