Wednesday, October 19, 2016

Founders need to share their mistakes with their investors

Startup founders are supposed to provide regular updates to their investors so that they can track their progress. Sadly, this is not something which most founders are good at, because they think of this chore as being an irksome distraction. They would rather focus on creating a better product so that they can delight their customers , and engaging with their investors is a low priority for them.

However, a startup has two customers when it's in its early stages. One is the customer who buys your product; and the other is the investor who has given you the money to run your company. You need to treat your investors well by fulfilling their expectations, so that they will continue to help you to grow.

Part of the problem is that most founders are very  selective when sharing updates. They will only highlight what's gone well , and will gloss over all the difficulties which they are having a hard time dealing with.

This is because they are worried that if they share too many details of the problems they are having to tackle,  their investors will try to interfere and micromanage them in order to help them solve these. This is the one thing which a founder dreads, because he values his autonomy . After all, one of the reasons entrepreneurs choose to found a startup is because they prize their independence. They want to be left alone , and they don't want big brother breathing down their back all the time.

Founders need to learn to be upfront with the problems they are facing, and they should emphasize the low lights during their updates. They need to share the mistakes they've made; the regrets which they have; and more importantly , what they've learnt from those mistakes .

Not only this will disarm your investors, it will increase their confidence in you . They can see that you are being honest, transparent and thoughtful. Rather than trying to get defensive as to why you have not been able to meet your revenue projections , it's far better that you be frank and forthright. They will be able to see that you being focused, and have a strategy to deal with the problems you are facing. This will increase the respect which they have for you .

It is also useful to have a premortem slide, which emphasizes what can go wrong going forward as well, and what you plan to do in case things don't pan out the way you want them to.

One of the other concerns founders have is that if they share too much information about the difficulties they are facing, their investors may get spooked , and will be reluctant to continue providing support. This fear is misplaced . After all , investors are on your side, and want you to succeed, so please don't think of them as being adversaries - your interests are aligned !

When things are going well, you don't need help from anyone , and you can continue to grow on your own . Your funders may help you to grow faster, but you can manage well for yourself when things are going well. You need their help the most when you encounter difficulties, and this is why you should not try to hide your problems. They often have a lot of experience, and may be able to provide solutions you may not have thought of.

Good angels are likely to be forgiving, especially if you are upfront about your problems, and have not tried to hide them. They will respect your honesty - after all, sharing your mistakes and telling us how you plan to recover from them helps us to become smarter as well !

We understand that things go wrong  with any startup - after all, that's the nature of the beast. As Ray Dalio says, mistakes are good things. You need to be radically  honest and transparent about your goofups  , and this should be an integral part of the culture of your startup. If you practise this, it will be engrained in your employees as well. This will help you to recover from mistakes much faster , because it will allow you to learn from them, rather than waste energy trying to cover up your  errors.

When you are bouncing back , you should explain to your funders what leading indicators you are tracking during your pivot , and how these will help you identify what could go wrong before too much damage is done. What key metrics are you monitoring and why? It's helpful to have a template which covers the key areas: money/ cash flow; employees; product  ; customers; competition; and regulation. Raw data is helpful , so please share this. This is best done online, so we can track your past performance as well.

If you've shared information openly with your investors - both the ups and downs - they will trust and respect you, and are much more likely to be helpful in your time of need . Funders hate it when founders hide information from them, and then ask for help at the last minute , when they find that the company is sinking , and the damage is beyond repair.  Sadly, there is little we can do at this time to help you turn things around.

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