More often than we would expect, discussions between investors and entrepreneurs go completely off track. An investor focuses on some meaningless piece of the business plan, the entrepreneur goes into endless monologues about the potential of the products or both parties are trapped in a ping-pong discussion around overall strategic issues. In many of those instances, there is a communication gap, a simple translation error.
Investors and entrepreneurs tend to speak very different languages. An investor is on a quest for the most promising deal that makes analytical sense and can be presented to boards. An entrepreneur is out in the open to sell an emotional piece of vision, a story about great products that bring value to the customer. Sometimes – not always – but sometimes, these worlds clash and lead into a meeting room nirvana where each party asks itself afterwards which truck just struck them.
I am listing six instances of false assumptions that I have made myself on either side of the table. They are mistakes I made or things I merely realised after a while. Let me know if you have other points or experiences – happy to add! Anyway, while I write this it’s damn hard to stay out of those mistakes even when you are aware of them.
False Assumptions on part of Entrepreneurs
The Quicky
When we were initially presenting our business case to investors, we generally assumed that we needed to break even as soon as possible and show them the most exciting profitability margins mankind had ever seen. I today realise that it’s much more important to have a clear understanding of what you want to achieve with the funding in the next phase of your venture and what your most pressing problems are that need solving. I realised that setting targets for key metrics, developing testing strategies and coming up with a budget for such activities was much more important. At the same time, focusing on the potential of sales is much more important than trying to provide a crystal ball forecast on gross margins and EBIT.
The Hockey Stick
I guess that’s a classic. Of course, our businesses always had tripple digit year-over-year growth rates with exponential increase in sales in years three to five. Today I realise: Who actually buys that shit? While the investors that eventually agreed to fund us may have appreciated our creativity, they surely did not believe in sports equipment in business. They believed in us as a team, in our vision and in our ability to make it happen.
The Follow-Through
Every time we closed an investment we were absolutely enthusiastic. It felt like a huge backpack was released from our shoulders. And that’s the way it should feel like. But we also knew that the next day, we would start the next financing round. We knew that our new investors also wanted to be our partners and we had to make sure they got the attention they wanted and deserved. Financing a business is an ongoing activity, not a one-time engagement. It’s tough for entrepreneurs to realise that.
False Assumptions on part of Investors
The Bible
We are under constant pressure to justify our investments. Our due diligence processes, our legal documentation and our procedures to minimise risk are at the very center of every fundraising effort and investor relations activity. That’s why we tend to request extensive documentation and the business plan is the first thing that comes to mind. But of course, in the end, a business plan is obsolete as soon as it leaves the printer. Instead, we try to focus on selecting the right entrepreneurs that can turn around a business when it hits its first obstacles. Every business will face difficulties and challenges. And when the s… hits the fan, only a strong entrepreneur can bring it back on track.
The Almighty Analyst
When you review business plans you quickly get into a mode of “aw, that doesn’t make sense! Why not do it like that?”. That’s when you start making suggestions to the founders and dive into their business – and when you get really excited, you want to rip the product from them and run with it yourself. Not a good idea. While understanding a business in its entirety is indeed important, your role isn’t to be a CEO. It’s to analyse, give it a go or no-go, maybe even suggest a couple of contacts that could help but then let the entrepreneurs do their magic. If you don’t trust the founders in the first place, you better leave the table.
Writing Murphy’s Law
We are constantly assessing risks of new deals which makes total sense. You’ll have to make contingency plans especially for those risks which you cannot directly influence. But there is no need to plan for an alien attack or the rise of the Jedi. It. will. never. happen. Period. But even if it does, those kind of events will let you think on your feet anyway. So it’s a thin line between assessing risks and being overly pessimistic. Not easy for me to handle that line. As an entrepreneur, you jump off a cliff and build a plane on the way down. As an investor, you have a passenger seat on that plane. It’s even scarier. Live with it.
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