How investors help start-ups to fail – the Responses
Posted by Dr. Earl R. Smith II in Questions, tags: adviser, advisory board, angel investor, board of directors, CEO, chairman, coaching, consulting, director, earl r smith ii, earl smith, Executive Coaching, federal circle, federal contracting, funding, Governance, government contractor, investing, investment, investor, Leadership, leadership assessment, leadership coaching, leadership development, leadership styles, management assessment, managing partner, Personal Growth, the federal circle, turnaround, Turnaround Management, Venture CapitalDr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
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I do a lot of work with companies that have received funds from investors. One of the more shocking syndromes that I have seen is the negative impacts that some investors can have on their portfolio companies. This can take many forms. One particularly, the lack of performance metrics, is described in my article Lack of Accountability – The Core of Failure. But that is just one of many. I am writing a book about angel investors and would like to get your input on other ways that investors ‘shoot themselves in the foot’ and damage their portfolio companies.
© Dr. Earl R. Smith II
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Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic adviser to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.
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Dr. Earl R. Smith II • Art, As you know, there are sources other than investors for such R&D efforts. I am amazed at the number of teams I have met over the years who ask your question. When I ask them ‘how much funding have your received from programs like SBIR and STTR, they either look at me like I’m from Mars or mumble something about socialism and government control. The truth is that investors prefer teams that have found creative ways to mitigate risk by seeking alternative funding sources. They avoid teams that are too lazy, narrow minded or just not bright enough to solve the R&D funding problem. Dr. Smith
Art Medici • Stephen, if I’m a bio-tech start up which likely requires tens of millions in R&D, how do I boostrap that? Your guidance suggests that developing new technology is for the already wealthy – not for the bright young scientists coming out of MIT, Cal Poly, Harvard, Stanford, Hopkins. If not for investors, where/how would they secure capital?
Dorina Grossu • Some short term solutions; since many companies have never been in business before therefore they have a limited amount of knowledge regarding business development the easiest way is to implement a thorough process development with written policies that can guide their business step-by-step. Simultaneously, local businesses should have some hubs set-up for communication purposes, resource sharing (fax, manpower, knowledge) etc.
For some other companies, investors can hire external companies to help start-up companies to growth or they can have the more developed companies helping the newly created companies to expand their business by providing training, business processes etc. Instead of encouraging competition among companies, the new shift approach should be towards sharing, collaboration and inclusion.
Brian, Good suggestion – I look forward to you starting such a discussion. Dr. Smith
Brian Javeline • I was waiting to see how long the thread would take to loose its focus, and it has. It is important to note that Investors do have a positive aspect to creating a business, so how about now creating a more proactive them such as “How investors can help start-ups thrive?”. Sure, negative headlines get everyone talking but let’s move away from negative water cooler talk and move on to positive thinking.
William Mooney • Dr Smith I was about to respectfully disagree with you until you mentioned the collapse of some of companies that applied an unhealthy focus on profits. The current financial crisis in our country can be attributed in part if not totally on greed and an unhealthy focus on profits. Figuring out how to do what you do better should keep you up at night – don’t let investors focus cloud your vision. Strive to be the best at what you do or offer, listen to their advice – it may prove helpful. However, remember they will most certainly not have your passion or sense of commitment to the business. Their commitment is to the Dollar.
Dorina, Your first point is particularly accurate but needs a bit of expanding. While it is true that some companies do not know how to set up metrics – particularly those focused on the investors objectives – many entrepreneurs fail to get funding because they do not want to be subject to metrics – at least not meaningful ones. I have had numerous conversations with founders bellyaching about how difficult it is to raise money. When I dig into their situation – ask investors who they have presented to and rejected their proposal – I find a common pattern. The imperious children are avoiding the issue of accountability and metrics.
Your second point is also relevant to the discussion. I recently published a series of three interviews with investors. One of their reasons for turning away from an opportunity was the weaknesses in the team. They highlighted two areas particularly – HR and finance. Uneven team strength is a big reason for failure in the money chase.
Finally, the investor world has changed since the bubble burst in the late 90s. Investors are now far more reluctant to fund product or process development. They expect that resourceful founders will find way to get that done. They prefer to fund market development that generates revenue.
Investors who do not insist on terms and conditions such as those outlined above and in my articles help companies fail by not forcing them to focus on things that are critical to success. In other words, these investors are far too easy on founders and their teams. Alternatively, investors try to compensate for a weak CEO by becoming a shadow CEO. Again, a recipe for failure. Investors help companies fail by not being tough enough as investors. Dr. Smith
Dorina Grossu • Each company has different problems but to summarise some issues that I have seen would be:
- Companies do not know how to set-up metrics to measure progress while others do not understand which business area creates most of their problems to be able to rebalance their efforts within a short time frame. (Business Process Management –Contingency Planning)
-Companies prefer to hire people with certain academic credential because they lack HR knowledge to perform candidate’s selections which in return cost them much more because theoretical knowledge can be learned while the desire to be successful is an intrinsic quality that characterizes each individual. R&D are in danger of hiring people who were maybe good in learning but have never delivered products that can be used on the market. There is a disconnect between academics and business markets.
-Large amount of time lost between product/process development to implementation and delivery to customers/clients.
-Some companies lack a methodical approach to new products development and lose time and money.
Richard Schilling • Great topic…
It seems if people on all sides get beyond the “just find enough investors and it will work” mentality, you can begin to see what works and doesn’t in the investor/entrepreneur relationship. The basic nuts and bolts of a business have got to be there for anything to work. The investment must serve a purpose.
Understanding exactly what difference the investment makes in the company seems to me to be just as important as understanding who is running the company in the first place and why they’re seeking investors…
For example, with business processes being patented regularly now, it’s really important for the investor to understand what intellectual properties they are buying into.