When an investor believes your idea has great potential to go big, it’s human to confuse the relationship with a friendship. Truth be told, it’s not. Investors have faith in your startup’s concept, team, and solution. They want to believe your business can make them profitable. But if things go south, it usually means you won’t shake hands and remain best buds.
An investor’s core objective when putting money into a startup is to make a profit. In 99.9% of cases, what matters the most to them is to get a return on their investment. After securing a first round of funding from either a VC or investor, your next move is to establish professional relationships, not friendships. You cannot afford to make mistakes, which means you should expect investors to get tough on you.
Winning a battle doesn’t mean you’ve won the war. Focus on accelerating growth and never schedule board meetings without something to show. And by “something” we mean actual numbers, progress, improved MVP, diverse team, etc.
You’re business partners, not beer buddies
It’s easy to believe an investor could become a dear friend. Someone who believes your startup could make millions, may provide you with the motivation to step up your game. Many investors are fun people to hang out with; on a personal level, chances are you’ll love talking and spending time with them. The main difference between them and your friends, is that friends have faith in you as a person. Investors only believe in your idea’s validity in the market.
No matter what happens, a friend will always believe you can do more, even if you mess up. An investor only believe in you if your ideas goes big. Your chances of getting their trust back after you’ve failed are slim. Too many startup founders misinterpret the relationship they have with investors. Just because they’re cool people it doesn’t mean they’re attached to you. The better you understand the concept, the better chances you have to stay focused on the business.
The old adage “Don’t trust people. Trust their goals, motives and purposes” applies perfectly to the situation. Rather than confide in your investor and treat them as your friend, you should trust their goals, motives and purposes. This way you can manage expectations a lot better, and make decisions that are in the best interest of your business.
It’s nothing personal
Just because investors are tough on you, it doesn’t mean they have a hidden agenda. While it’s in the best interest of a VC to treat you as their most valuable customer, the moment they sense your business doesn’t deserve their money, they’ll walk out. As a startup with a vision and a proven concept, work with your investor to increase its value. Leverage their connections, strategy, and insights to attain your goals, but don’t assume that their kindness comes from the bottom of their hearts.
As an entrepreneur, you must understand that VCs are a fancier type of financial investors. While they do care what happens with your business, they have to satisfy the needs and wants of their investors, too. You shouldn’t take things personally if they suddenly decide to drop out. You may be dealing with one VC; but that one VC most likely deals with 20 other startup founders. His job is to do business with the best, and quit those that they no longer believe in. At the end of the day, it’s all about money and not feelings.
Imagine an investor is like your bank, mortgage holder or credit card company. These institutions want you to do well, so that you can afford to pay the interest and even get refinanced. If you don’t, they won’t hesitate to cut all ties and move on to someone with a better credit score.
Challenging your potential is part of their job
Some investors are tough on you and startup because they want to see results. Many appreciate friendly meetings and monthly hangouts to get the edge off. But as soon as you’re back in the office, they want you to stick to your promises. Nobody wants to lose money, which means they’re ready to challenge your potential anytime to be certain they’ve made the right call when they wrote that check. How do you assure them they’ve made the right call? You show them progress.
Let’s assume the last time you met over drinks and you’ve had a blast partying all night long. It’s been 3 months since. Now they want to schedule a meeting to “go over some things”. The biggest mistake you can make is assume they want to see you to talk about the crazy night you had together 3 months ago. Prepare to be challenged instead. Your investor will want to sit down and crunch the numbers; assess your financials, ask questions, and even challenge your potential with a couple of “Why didn’t you do this and that” questions.
Don’t feel bad that they don’t want to talk about the fun stuff. Although they do want to build a solid personal connection, their interest is to get a return on their investment. If they see you’ve made progress, who knows, maybe they’ll take you out for another crazy night.
Investors have responsibilities, too
Assuming investors have loads of cash to mess around with is a big mistakes. Smart VCs don’t throw cash into every startup that pops up on the market. You’re probably one in tens of other startups in their fund portfolio, which means one of their responsibilities is to manage an investment portfolio for other business partners. This means they made promises to other people, too.
If your business doesn’t increase in value to attain liquidity, VCs are forced to drop out. It doesn’t meant they don’t like you as a person, but it’s their duty as business people to invest in deals that have real growth potential. Great investors will do everything in their power to help your startup become a profitable company. Some will want to get involved and help with advice and guidance, not just cash.
Regardless, they’re not your friends, but your frenemies. If business goes well, everyone’s happy. If things go south, they’ll leave you empty-handed without hesitation. For a founder, that’s tough to grasp; and you will only be able to understand why they left after you’ve carefully assessed your own mistakes, too.
The unwanted guest who keeps your business in alert
Every now and then an investor may be perceived as “the terrifying individual who barges into my company unannounced”. VCs are tough on their entrepreneurs because they don’t want to see them take their money and do nothing with it. A first round on funding doesn’t ensure startup success. It’s quite the opposite. You’ve got the cash, it’s time to get to work!
However, startup founders make the mistake of not keeping investors informed with what’s happening with their business. Many don’t ask for help because they don’t want to seem vulnerable. Instead, they make decisions (bad ones, usually) on their own and they complain that investors are not happy. Smart entrepreneurs on the other hand, are not afraid to embarrass themselves because they’re reasonable enough to accept they don’t know it all.
Why should investors be tough on you? Because otherwise you might perceive them as your friend. Friends can afford to borrow money from each other and be late with repayment - when dealing with investors, entrepreneurs don’t have that luxury. You should learn to accept feedback as well as constructive criticism. Keep your investors updated with your progress on a monthly basis. A well-crafted report saves you from tens of unexpected questions, or a physical visit at your office at the worst possible time.
Investors and startup founders live in different worlds, and are cut from completely different cloths. While angel investors leverage their own money to fund a startup, VCs have a structure that demands them to contribute with 2-10% of the fund’s capital and get no bonus until startup founders pay back that percentage in full.
Regardless, no investor wants to lose money. Founders on the other hand, invest time; lots and lots of time. They care about capital loss, too, because failure will prevent them from raising a second round of funding. Smart entrepreneurs are fierce athletes on a playing field; they’re excellent operators with a very strong strategic sense. The best make prompt decisions, seek advice, and deliver results.
Investors are better described as coaches. They know how to give advice because they’ve been through similar situations before. Although they don’t want to befriend the founder, they care about nurturing talent to help the business succeed. Bottom line is, you shouldn’t take things personally. Some investors are tough because they want you to succeed. Above all, they want to be sure that their putting their money to good use.
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