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When to tell your investors to back off

Aug 19 2013, 10:55   |   By SME Mentor

Ajeet Khurana

Here's something that will hopefully rescue entrepreneurs who want to stick it to their investors. What am I talking about? You know, an annoying, meddlesome investor who thinks he's Mr Know-It-All.

With several years of experience as an entrepreneur as well as an investor, I have watched the start-up space from both ends of the table. And, umpteen times, I have seen investors behave as if they know more about the business than the entrepreneur does!

Sure, there are many areas where the investor's experience may outweigh the entrepreneur's expertise. This is usually in areas such as accounting, financial management, intellectual property management and statutory compliances. But when it comes to the very essence of the enterprise, I think investors should back off. That's just common sense, right? So why is it not common practice?

Is The Entrepreneur At Fault?

When raising funds, entrepreneurs tend to make ambitious forecasts. The idea behind these lofty projections is:

(a) To increase the investor's willingness to invest

(b) To cause an upward bias to the valuation that the investor might be willing to accept

In most cases, these forecasts do not fructify, often by a huge margin. And when this happens, investors get nervous. So they start scrutinising everything the entrepreneur is doing. They usually find that the books of account are not adequately maintained as a majority of entrepreneurs tend to ignore this area. But, after getting the books in order, the investor starts interfering in other areas of operation too, and this is where problems begin.

Why Does The Investor Get Away With It?

It is not only annoying but worrying when the investor starts participating actively in hiring, pricing, marketing and other core areas of business. In such a scenario, the investor begins to execute decisions but bears no responsibility for their outcome, while the entrepreneur continues to be accountable. The reasons the investor can get away with this is:

(a) Since they gave the entrepreneur money, it makes the entrepreneur obligated to listen to them

(b) As a spectator, investors have far more exposure to businesses than the entrepreneur does

If Investors Are So Smart, Why Don't They Run The Business?

The fact is neither can investors actually run a business nor do they have any inclination to. But insecurity and a false sense of superiority tend to push them down the slippery slope of micromanagement. My premise is simple: if you are so smart, assume responsibility for outcomes too.

Entrepreneur, Just Say 'No'!

If you find yourself in a sticky predicament like this, ask your investor if they would like to run that part of the business. Don't worry, your challenge will not be met with a 'yes'. And don't hesitate to talk tough. Simply remind them that they primarily invested in you as entrepreneur, and if they do not allow you to run the business, there is virtually no chance of a positive outcome to their investment. If you express your standpoint in terms of their vested interest, you will quite likely hit the bull's eye.

The scenario I have just discussed is stereotypical. There are entrepreneurs who achieve or even surpass their projections. On the flipside, there are discerning investors who know when to play mentor and when not to. But with the start-up space rapidly expanding, there's no saying who dons which mantle!

The author, Ajeet Khurana, mentors start-ups. An angel investor, trainer, author, entrepreneur and digital marketer, he is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. When he has nothing better to do, he blogs at StartUp Gang. He is also on the boards of Carve Niche Technologies and Rolocule Games. You can reach him on LinkedIn and Twitter.

You can send your feedback on smementor@moneycontrol.com or simply post comments below


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  •  SME Messenger |   Aug 19 2013,10:37