How Investors Kill Companies
AI art by Midjourney
Many founders look to investors to make their companies. They imagine investors providing capital, but also advice, credibility, attention, support, and more. The best investors do provide this, and more.
But… founders tend to miss that investors can harm companies.
Bad investors aren’t merely neutral – they can work against you, intentionally or not, in ways that endanger your company.
Here are some things to look out for:
Offering higher valuations (to win deals)
An easy way to win a challenged deal in venture investing is to compete on price rather than value. Offer the founder a higher valuation. This is a short-term optimization that costs the company future optionality. Better to raise at a reasonable valuation from the best possible investors than the best valuation from average investors.
Demanding you spend the money fast
Time is more scarce than money for venture capitalists. They want to resolve the ambiguity of your company ASAP. They want a fast markup, which makes it easier for them to raise the next fund.
If you can’t spend the money well yet, don’t spend it. Conserving cash gives you more control, and frugality is rarely regretted.
Demanding you raise at a markup
The immediate subsequent round matters much more to investors (relatively) than it does to you. Remember your goal is to make the company successful. As a byproduct, you hope to make investors money. But don’t risk the whole game to win one inning by someone else’s scorecard.
Forcing Acquisitions
I’ve seen Venture Capitalists with board seats push founders hard for “soft landings” of their struggling portfolio companies. Force-feeding an acquisition to a startup is a huge cost, distraction, and risk that helps the VC—but may kill your company. Be dubious of acquisition suggestions that are too convenient. Make the history of these sorts of activities part of your due diligence on investors.
Copy/Pasting Tactics From Other Companies
Mid-wit VCs are very “of-the-moment.” They take whatever seems to be working at their company with highest growth today, and push those tactics to the rest of their portfolio. Often, those tactics aren’t suited to other companies – or are short-term optimizations without long-term results.
YOU are the founder of your business, and should generally assume you know what is best, unless persuasive evidence is shown otherwise, by someone with clear experience that applies to your situation.
Do not let anyone push you into weakening the long-term impact of your company for their own benefit.
Building companies that bring huge visions to fruition is what pushes the world forward. You’re on a mission from God. Stay focused.
This is why when founders ask me what value I provide (in an investing context), I say my first commandment is, just like the hippocratic oath… “to first do no harm.” We’re not going to be able to make a better decision than you in 999/1000 cases. Best we can do is share what we know in a light-handed way, and let you do your job the best you can.
If you want to share your vision with us, please check out rolling.fun. If you want to invest capital alongside us into world-changing founders, we’d love to have you.