Caution: Bad investors kill good companies

Around Silicon Valley, we all believe that having a good idea is not enough, and it is rather the execution that counts. And myths abound about how savvy investors like Sequoia or Kleiner Perkins can make a difference between a blockbuster success and a lackluster startup. I accept all of that. However, what has been left out of the conversation is an examination of the impact that bad investors have on promising startups. Sadly, few entrepreneurs pay much attention to this issue at the time of fundraising. It is time for some healthy debate on this topic, and here is my first stab at it:

What is a “bad investor”?

Some entrepreneurs assume that the worst that an investor could possibly do is not to add value. That is not true! As I will explain below, a bad investor (like a bad friend) can totally distract, demoralize, and completely ruin the future of your company. More specifically, a bad investor is one without whom your startup would have actually had a better chance of succeeding. 

How to spot a “bad investor”?

Typically, bad investors are those that are disengaged from the startup and the Board when the times are good, but become quite concerned and agitated as soon as the company hits a rough spot (e.g., a key employee departure, a drop in key metrics, appearance of a lawsuit, etc).

What is so “bad” about a bad investor?

The main problem with the behavior described above is that it sabotages your success by putting stress on you when you can least afford it. Here is why:

Every startup goes through ups and downs; it is just a part of the creative process of innovation, as we all know. And “creative” is the operative word here. In a startup, you try things, some work, most fail, and you try to learn and repeat the process with better results next time using as much creativity as you can manage. These creative iterations are to a large part dependent on outside-of-the-box thinking. This is especially true when you need to do some major pivoting work around your business model / customer acquisition strategy / etc. That means you will need to take some major risks. However, whenever you focus on risks, fear enters the picture and your brain literally shuts down its creative parts and goes into defensive/survival mode, which means you become physiologically incapable of finding the creative solutions to your problems. Most of us have first-hand experience of this phenomenon, which is also supported by a growing body of psychology experiments (see, e.g., feeling good increases possibility of insights).

So, here you are, on the verge of losing everything (your reputation, the trust of friends and family who believed in you and perhaps even invested their savings into your company, your employee’s livelihood, and the list goes on and on) while trying to keep calm and not panic. And as a savvy entrepreneur, you may be able to push back the internal fears and stress to come up with some creative solutions and insights. But it becomes an order of magnitude harder to do so when you have, at the same time, one or more investors breathing down your neck, distracting, harassing, and perhaps even threatening you and other investors, second-guessing every move and chewing up your remaining brain cycles. It becomes pretty much impossible to be creative under those circumstances, which unfortunately spells disaster for your company, as you will be unable to find a solution to your predicament, no matter how trivial the solution may seem post mortem.

Lots of great companies were second ideas that rose from the ashes of their predecessors. And more likely than not, the investors in those companies were understanding and supportive during the tough times, expressing something like “Hey, I know you guys have been working really hard and it is okay if the startup doesn’t make it. We knew the risks when we invested and were honored to have been a part of this journey with you.”  And that is the kind of investor you want to have!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s