A Top Unforced Error: Alienating Your Investors

So I’m seeing something I haven’t seen since the high-stress times of March-June 2020 or so: founders alienating their investors during tougher times.

Some of it is almost natural in tougher times in general, but VC-founder tensions are exacerbated these days due to the mammoth size and outsized valuations of 2H’20 to early ’22.  Founders are under stress where growth has slowed or stopped, and VCs are under even more stress than in other challenging times because they might lose a lot of money.  Not just a little money.

So I see … tensions.  And some of the tensions are just fine.  But then, sometimes, I see founders push it too far.  Often because they feel pushed too far by their own board and investors. 🙂

The thing is, it’s not symmetrical.  As a founder, you aren’t an investor — you’re much more.  You’re the CEO and the folks that run the place.  That means, of course, you know more operationally than your VCs.  And your VCs have more pattern matching on their side.  They’ve seen multiple startups struggle, and are looking for signs you’ll either bounce back later … or won’t.

One bit of advice, though.  No matter how frustrating it can be to work with your VCs and investors in tough times, don’t break things.  There’s no upside to it.  Even if it feels deserved in the heat of the moment.  And there’s significant potential downside down the road.  If you break things with your investors:

• A broken VC relationship can make a “so-so” acquisition really hard.  If you’ve raised, say, $5m and want to sell for $25m later, that’s not really a win for your investors.  But it’s not a loss, either.  Will they be supportive?  Probably, if they’ve been treated well.  But maybe not, if they haven’t.  VCs are often on the fence on these so-called “mediocre outcomes”.  But they do tend to vote Yes with founders they have great relationships with.
• A broken VC relationship can make an acquihire really hard.  Acqui-hires are funky, and sometimes, a so-called acquirer is happy just hiring folks and not doing an acqui-hire at all.  But in many cases, an acqui-hire will require the investors to make, at best, 1x their money back.  They’ll be supportive if you gave it your all.  If you burnt them?  I often see VCs rather unsupportive.
• A broken VC relationship can make the next round much harder.  Not always, but often.  The next round VCs will want to talk to your existing investors.  Corners were cut here in the Boom Times, but traditionally, it’s a critical part of diligence.
• A broken VC relationship can make consents for just about anything harder.  If a VC is on your board, you’ll often need their consent for a lot of things.  More stock options.  A new 409a.  Just lots of things.  You don’t want ever consent to be a high-stress moment.
• A broken VC relationship can partially poison the rest of your syndicate.  When one VC completely loses confidence, it sort of can’t help but spread.  At least a tiny bit.
• A broken VC relationship makes recruiting harder.  It certainly doesn’t make it easier.  Your VPs will often want to talk to your investors.  Having to hide one of them doesn’t help.
• A broken VC relationship makes board meetings really hard.  If nothing else, it will weigh on the team.
• A broken VC relationship reflects poorly on you.  It’s a built-in negative reference check.  Almost no one will think it’s “100% their fault” (almost nothing ever is, really).  Or that there’s really much fault at all.  They will think it reflects poorly on the CEO, even if it also reflects poorly on the VC.
• A broken VC relationship is almost impossible to fix.  So it’s broken for years — but you still have to deal with them!  It’s actually pretty easy to walk back merely tense moments with your investors.  Just call them up the next day or the next week if need be and say they were also at least partially right.  But if you push it so hard that it’s truly broken, the VC just writes off the investment in their mind, and often literally.  You can’t undo that 6, 9, 12 months down the road.

If your VCs are jerks, well then, too bad.  You picked them.  It’s done.  And it’s very, very hard to get rid of them.  Telling a jerk they are a jerk though … gets you nowhere.  And maybe, just maybe, you’re at fault a bit, too.

Whatever you do, don’t alienate your investors.  There’s just no upside there.  None at all.  It just ends up a painful, unforced error.  Treat them like you’d like to be treated, if you were them.  Even if it doesn’t feel deserved.

And whatever you do — don’t hide things.  And no surprises.

A related post here:

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