On the Same Side

Recruiting venture investors always feels adversarial as they ask tough questions and challenge your assumptions. However, once their money is in, you are all on the same side.

I was recently reminded of a pattern that has always held true in my experience, which is sometimes not so easy to recognize. The alignment between startup management teams and their investors follows a predictable path that shifts quite dramatically and consistently as investors move from sitting across the table to the same side of the table.

From Across the Table

Startup fundraising often takes many months and many rejections. Often those rejections come after some amount of diligence takes place.  “Diligence” consists of explaining the story of your startup and defending your concept, strategies, progress, and results in the face of many questions designed to uncover weaknesses in your plans or progress. The process is grueling. It almost always feels adversarial as you are constantly being put on the defensive. And yet, you persevere because addressing those questions and concerns is essential to convincing a potential investor that what you are working on is a worthy and valuable project.

Once you have convinced an investor to embrace your project, the process often moves to negotiating the terms of an investment.  Again, in this process, the team and the potential investors have opposing interests and, often, the investors hold a great deal of power. By the time the term sheet is negotiated and signed, and then the investment documents are thoroughly negotiated, the entrepreneur will have many opportunities to “compromise” and swallow terms that feel harsh and disappointing. The pressure builds. The awareness of how important it is to get the deal done becomes ever-present. I have been struck regularly by just how tenuous the whole deal is when someone threatens to pull out or scuttle the deal at the last minute.  Or gets surprisingly untrusting, like the times when closing day revolved around which VC was willing to initiate their wire first – and wondering if we really were going to snatch defeat from the jaws of victory. Ultimately, if all goes according to plan, the closing of the investment happens, usually with a number of heart-stopping last-minute snags. But the emotional toll persists.

Since this process will play out over a period of months or more, by the time it is over, you can feel well-rooted in a place the is adversarial, confrontational, and threatening when engaging with your investors. There is a great deal of caution and verification that takes place as each side tries to ensure that they are not hood-winked or taken advantage of at the last minute.  You are on the opposite side of the table from your investors during the recruit funding stage.

To the Same Side of the Table

When you and your investors successfully make it through closing, something dramatic happens. Effectively, once their money is in, the investors get up and move around to your side of the table.  Now your interests are both aligned with the goal of achieving a successful company. 

While this dramatic and practically immediate shift occurs, I have noticed that many, especially first-time, entrepreneurs are not fully aware of the shift. They do not recognize that the investors have moved from a place of being an adversary to being an advocate. I think this is often because the emotional side of fundraising makes it hard to see the shift, and sometimes investors do not make it particularly clear. Investors are emotional beings as well and can get entrenched in adversarial habits even when it is not productive or consistent with the objective interests of both sides.

Nonetheless, as I have raised round after round, in startup after startup, it has become clearer and clearer that once your investors have put up their money, they want to see the company become successful.  And they are eager to help the management team make it so. Given that experience, I now know to very consciously think about the idea that closing is a point when the investors move from across the table (adversarial) to on the same side of the table (advocate) where we tackle problems together and all work towards the common goal of the startup’s success.

In practical terms, remembering that your investors are on the same side of the table translates into telling them about problems at an early point to avoid surprises and embrace help if it is available, keeping communication open and flowing so the investors can embrace and support the startup’s evolving strategies, and realizing that negotiating an attractive exit is in all of your aligned interests (the strategic acquirer now occupies the other side of the table). Your investors can bring essential experience and play a crucial role in negotiations. If you don’t realize they are now on your side of the table, you will waste time selling them on things they don’t need to be sold on — and not engaging them as partners in problem-solving.

So, become deliberate in recognizing when you are on opposite sides of the table as well on the same side of the table so that you are prepared to engage appropriately for the circumstances. Remember that once they are in, your investors are some of your greatest resources – and you do not want to miss the opportunity to take advantage of their help in achieving the success that everyone wants!