Tail Wagging The Dog!

The unequal, and at times, inexplicable relationship between entrepreneurs and investors

Why don’t start-up entrepreneurs treat equity investors as yet another service provider? We go to a web developer when we want a website, give him the brief, share the workflow, freeze on payment, agree on deliverables in a datelined fashion and release payment as per these deliverables, in tranches. There is a contract we enter into at the beginning of the engagement which defines confidentiality, terms and conditions and disclaimers. Just as the web developer brings his web development skill to the table, the investor brings his capital resources to the table in exchange for a slice of ownership of the company.

In this article, I’m referring to those investors who are minority share-holders, even purported angels (never in any other context has this word sounded more sinister than in the context of entrepreneurship), who invest, say under a crore in a business, that grabs their imagination. Yet from the word go, the relationship between the entrepreneur and the investor is Pavlovian, the former being the salivating dog. Who gave the investor the upper hand here? When did investors become demi-gods? And who will kick them off their pedestal and how?

Let me reiterate yet again. I’m only referring to early stage investors, the seed fund guys, the angels and the like, who exchange capital for equity (debt guys please excuse), either in the beta stage or soon after monetization (proof of concept stage). Although the ticket size is small, the business risk is rather high as the whole team is on uncharted waters (except co-founders there may be no team worth the name), the company could take off like a gazelle or sink like the proverbial sack of potatoes, its valuation is anybody’s guess (thumb rule is that depending on the product, at this stage, valuation could be anywhere between Rs 1-3 crores), and however much one would like to believe that there is a whole science involved in the two players playing footsie, in truth, it is the entrepreneur’s infectious enthusiasm that the investor is buying into. Both parties know that the numbers bandied about are mere window displays, a conversation of possibility, not so much a dialogue of certainty.

As the entrepreneurial ecosystem came of age in the Valley and elsewhere (it is present continuous in India), these angels have assumed larger-than-life mindshare of the entrepreneur, so much so, in many conversations I have had the distinct feeling that in India people become entrepreneurs only so they can claim they are funded! The glamour quotient in a funded business is so disproportionately high, no wonder this community has been given to believe that they are god’s gift to mankind (I am using the word mankind consciously here. They fund entrepreneurs who in turn create businesses that benefit mankind, see?)

I don’t know the percentage of businesses that have not taken off after the first round of investment, but I won’t be surprised if their mortality is higher than those that were not funded. I will not go into all the reasons for this but I can make a reasonable guess that businesses that were not seed funded were extremely hungry for the market and their market preparation and customer-facing attitude were wily nily better than those that were funded who developed complacency and sluggishness (money in the business artery can accelerate circulation or grow plaques that obstruct).

Another very important reason for their failure is that most of these investors misguidedly became mentors to the entrepreneurs. They must have assumed that one, given their experience they were good mentor material, and two, they would also be protecting their investment.

So somewhere in the last two decades, the investors put themselves on a pedestal and played hard to get. Sometimes they put out in the media that they were sitting on a pile of cash, that it was a happy scenario where money was chasing ideas. Strangely at exactly the same time, entrepreneurs were bemoaning that capital was in short circulation, so much so, most of them were engaged in ‘pitching’ to the multitudes of investors instead of becoming market-ready. I know entrepreneurs who have sung every single song that the investors wanted to hear, in every single raga, to every single rhythm – in desperation- literally many would not even recognize their own pitches, given how much of tweaking they had done at the bidding of the investors- only to come up empty, and to add insult to injury, without as much as being told why they were turned down..

I can add to this tale of woes many a Hitchcockian twist- unreasonably low valuation (and here is an interesting fact, as an investor, I’m telling the entrepreneur that his company at this stage is worth shit, yet I want a higher stake in it – some new alchemy this!), unfair expectation of involvement in operations, paranoid obsession with blow-by-blow MIS- the list is long and lingering and not in a good way.

In one of the entrepreneurship forums I heard an interesting story from an entrepreneur who had quit after being funded. He was a panellist and he had an interesting narration. He said, exactly a month after the first tranche was released, he was called by the investor and told to move away from his business idea- to what?- anything but this. The stunned entrepreneur said, but you funded this idea, why do you want me to move away from it? He was offered no explanation and after mulling over this whole episode, the entrepreneur decided that in the interest of his sanity, he was better off quitting. So he simply walked.

When I heard these stories – and I have heard plenty- I felt that one day things would change. Or rather I hoped things would change. But I didn’t know how. Until I saw this post on the investor page of a company called Staply. It is a company, based in the US, I think, which is a communication platform where one can keep track of notes on anything in an organized fashion and share it in the user group. They are in the beta stage and are looking for funding. Last week, on their investor page, I saw this post :

Attention Investors: Staply user base grew by 3.97 percent last week! Want to learn more? We’ll come to you and answer all your questions about Staply for $10,000. We’ll fly to your city, tell you about product, business model, timeline, founders and answer all the questions you might have about Staply. We want to build a great company. To do that, we are working on Staply and talking to our users. We don’t want to spend our time on emails, calls, meetings, presentations that have high chances of not ending up anywhere. By purchasing this pitch [session for $10,000] you will assure us that your intentions with Staply are serious.       

Bravo, the brave new world is here, and how! Bum hurting after the fall, eh, investors?