Three roles that every investor should play What’s the right role for an investor to play with their portfolio? Should he or she be the biggest cheerleader, the toughest critic, or just have the deepest pockets?
As someone who is still relatively early in his investing career, I often think about what qualities set a successful investor relationship apart from the rest. Good investing and strong relationships don’t just happen. Like in a marriage, you have to work every day on making the relationship better and more productive for all involved.
Having sat on both sides of the table, I believe the real magic happens when you can carefully balance three pillars: supporting, challenging, and coaching.
Pillar one: the steadfast supporter
The moment the contracts are signed, the investor essentially joins the team and assumes the role of an early evangelist. There will be times when portfolio teams need an enthusiastic backer and a quick pep talk. Particularly when things get tough, it’s nice to know that someone will weather the storm and stick by you.
I remember trying to build my start-up during technology’s nuclear winter of 2001. Raising fresh money was nearly impossible, but our investor supported us throughout this tough period and didn’t take advantage of our situation. We financed the company at acceptable terms, even though the investor could have really turned the screws. Ultimately, we were able to sell our company to AbeBooks, which was later sold to Amazon.
Tough times bring out the true colors of an investor. Do they treat you fairly or take advantage of your vulnerable position?
Pillar two: the critic
Most entrepreneurs are inherently optimistic, so the last thing they need is someone who will be a cheerleader 100% of the time. Honest, sometimes harsh, feedback is necessary. Calling out a lack of financial discipline, lack of accountability, or poor product roadmap is never the popular thing to do, but this is when an investor often adds the most value.
I was reminded of the importance of this role a few months ago when a portfolio company of mine had just raised a large amount of money and started to scale the cost base much quicker than the revenue base. Within months the burn rate more than doubled to several thousands of dollars a month and as the company got distracted with aggressive hiring, the growth rate decelerated significantly. Since high burn and low growth are a lethal combination, this situation would have gotten critical had they continued down their path. Fortunately, the founders took my pushback well and right-sized the ship quickly.
Investors need to be comfortable in the role of devil’s advocate, asking the hard questions and challenging the assumptions. Founders need to understand that constant praise without honesty are just empty words. You need the investor’s perspective: they are looking out for you.
Pillar three: the coach
I’m a firm believer in learning from other people’s successes and mistakes. Individuals who have been through it before can offer great insight to entrepreneurs – such as how to attract top talent, build a strong board, expand into new sectors, etc.
I am always on the lookout for opportunities where my portfolio teams can improve, and often connect founders with a CEO coach. In addition, I share my own experiences scaling a company with portfolio CEOs and senior management teams. Getting an outside perspective from somebody with a deep understanding of the company or industry can be very eye opening – it often helps you learn what you didn’t know before, and build stronger problem solving skills.
As for founders, they should solicit advice from a wide variety of sources, but always filter any feedback through the prism of their own convictions. After all, it’s the CEO, and not the investor, who should have the final word.
While cash is crucial to scaling a company or getting a product off the ground, an investor can provide much more value than the checkbook alone. Investors need to be comfortable being the cheerleader one day, and offering the dissenting voice the next. Likewise, entrepreneurs should be open to receiving all feedback, no matter the message. As with any significant relationship, this one requires true effort on both sides to work.
Source : Three roles that every investor should play, Boris Wertz ( http://pando.com/2015/01/25/three-roles-that-every-investor-should-play/ )