Earlier this week I had a call with a friend who wanted help because his company is close to running out of cash and his investor is playing hardball. The company has been performing OK, but would have been better if my friend and his investor hadn’t been at loggerheads over distribution strategy and who should run the company. That conflict resulted in the company implementing a strategy it didn’t fully believe in which then didn’t work. Now both sides blame each other.
The lesson for others wanting to avoid a similar situation is to make sure there is full alignment on strategy and the investor has complete faith in the CEO. Strategy alignment can be tested before investment by discussing the company’s plans and how they might change under different scenarios. If investors and management think similarly on product evolution, target customers, routes to market and the balance between growth and profitability then conflict is less likely going forward. If there are important differences I would think carefully about whether an investment makes sense.
It’s also critical that investors have complete faith in the CEO. It’s a common conceit amongst investors to believe that they can compensate for a sub-standard CEO through their own efforts or by adding someone to the team in some kind of quasi-CEO role. However, the CEO generally doesn’t want to be compensated for and quasi-CEOs generally want to be real CEOs, and in my experience this path is folly. As soon as performance falters, which it inevitably will at some point, the investor will blame the CEO, the relationship will deteriorate and the situation will become harder to rescue than it should be.
VC funds need to deploy cash and startups need money to survive, so investors and founders are heavily incentivised to get deals done. This pressure sometimes clouds thinking and makes it easy for both sides to mentally dismiss the chances of conflict. Sometimes there’s no choice of course, particularly on the startup side (investors can always choose not to invest), and accepting the risk of conflict can be the best way forward, however, conflict hurts companies and is very tough emotionally, so if you find yourself in this situation please make your choice with your eyes wide open. My friend and his investor are learning just how damaging and painful conflict can be and I wouldn’t wish that on anyone.