As public markets and tech stocks rebound to exuberant highs, I have had an influx of calls from founders scratching their heads. These founders of companies born during the ZIRP era are sometimes confused as once-enthusiastic investors seem to have vanished. The text messages are fewer and farther between, and the engagement level of board calls is less energetic. When quoted in the media, blogs, and podcasts, they are now marketing their newer investments.
The specifics of these situations vary by company and investor, but the conversations prompted me to share my own framework for understanding investors and their incentives.
The best investors whom I have had the good fortune to work for/with do not show up this way. However, others do. My hope is that sharing these thoughts can help the next generation of entrepreneurs better navigate the psychological ups and downs of investor relationships.
Why You Need to Understand Your Investors
You need to understand your investors for your own sanity. The reality of entrepreneurship is that it is lonely. Unfortunately, lots of founders get their sense of self worth from the positive (or negative) reinforcement of their investors. Failing to grasp their psychology can leave you feeling frustrated and stuck at critical junctures.
More practically, you also may need long-ago disengaged investors support when you are seeking:
- Rescue capital to survive the unexpected
- Approval for a cram down
- Support regarding a debt renegotiation
- The go-ahead for a ‘big swing’ M&A move
These are not hypothetical scenarios—they are real challenges companies I support have faced in just the last year where lack of engagement and attention from some investors have left founders frustrated and exhausted.
You Are an Account to Be Managed
Here’s the mindset shift that brought me the greatest peace of mind: You and your company are an account to be managed. Their level of engagement has nothing to do with you as a person.
Founders often develop a sense of kinship with their investors, especially during the early stages. Before you took their check, you were a prospect to be sold to. Afterwards, you became an account to be managed.
Does this sound familiar?
- As a founder, you build relationships to get customers to buy your product
- Investors build relationships to get the best founders to take their money
In some cases, this starts as a trial run—think of smaller checks designed to get on your cap table early. In others, they see you as a major account with big potential for future capital deployment and investment returns, akin to a highly scalable enterprise customer.
Once you are in an investor’s portfolio, their engagement style depends on their business model and eventually where you fit within their portfolio. As you build your business, they will develop and periodically update their point-of-view regarding your potential, and what type of engagement your company warrants. They could put you in one of two broad buckets:
- Value Creation: Investing time with your business can increase its probability of success, the size of the overall outcome, or the total dollars they can put to work in the company (at high rates of return)
- Maintenance Mode: More time invested in your business will not change anything. Time spent with your business will come at the expense of being able to nurture accounts with greater potential. Here investors will seek to fulfil their reporting/fiduciary duties as they shift focus to other portfolio companies or new potential investments.
Maintenance Mode is highly rational since in these cases the investor has determined that there is limited ROI on their time with your business. If they see no pathway to change your outcome or invest more dollars, they will rationally allocate their scarcest resource—time—elsewhere. You would do the same thing with customer accounts where you cannot expand ACV and where there is no risk of churn.
There is a third, more unique bucket, where investors may rationally choose to spend lots of energy engaged with a company even if there is no value creation opportunity. If the company is noteworthy, they may get disproportionate attention because they represent a helpful logo (similar to a referenceable customer in software sales). This happens most often with founders who are nodes in critical networks (i.e. company X mafia), where the other investors in the company represent a network that is important to that specific investor’s firm, or where the founder has a well-established brand in an important community which represents a potentially fertile future investment area.
Few companies naturally fit in the third bucket. Founders should invest time and energy to avoid being put in ‘maintenance mode’.
What Happens When You Are in “Maintenance Mode”?
Being a maintenance account can feel freeing since you are largely left alone to operate. However, I have observed this is temporary and comes with risks that outweigh the positives:
- Lack of Context: Your cap table may not have the context to support you when critical moments arise (e.g. cram downs, recapitalizations, downrounds)
- Eroded Trust: Without regular engagement, your investment may lack the trust needed to make fast, supportive decisions. This is especially true if your recent operating performance has improved from historical norms. Disengaged investors may be stuck with ‘old tape’ without fresh data regarding you/your team’s performance.
- Missed Opportunities: You may not be able to count on them for additional capital, key introductions, or strategic help when it matters most
How to Avoid This Trap
The best advice I can give is simple: (1) engage directly with your investors and (2) demonstrate that you are coachable/listen.
- Ask them candidly how their firm thinks about your company. Don’t take their answers personally. Follow up with, “Given this, how can I best ensure you’re armed and up to speed if I need you to make a quick but critical decision?” and “what would need to be true for the firm to be more excited about us?”
- Make sure your investors feel like you listen – at least some of the time. Just as there is nothing worse in account management than a customer who is opposed to data/objective facts, founders who refuse to be helped and are not open to constructive criticism can be draining for investors. Eventually, they just give up trying.
Your goal is to build a transparent, pragmatic relationship where both sides are clear on expectations and you can tell each other the truth.