The relationship between a startup and an investor is a long-term commitment. Much like a marriage, it depends on trust, honesty and transparency. If any of these qualities is lacking between the two, there’s little chance that any long term value can be created.
It would not be an exaggeration to say that the initial pitch meeting feels much a like a first date when each side looks for an ‘instant connect’. The due diligence period that follows is quite like the courtship phase, and is the most crucial phase that decides the fate of the relationship. It is often this phase that determines, whether the startup-investor relationship culminates into a marriage or breakup.
To ensure that the relationship between a startup and an investor is a fruitful and fulfilling one, there are a slew of things that need to be taken into consideration.
Given below are the top deal-breakers between the two which prevent the relationship from culminating into a happy and successful one:
The ‘chemistry’ between the entrepreneur and investor
‘Chemistry’ between two individuals is a basic ingredient in any successful relationship, be it personal or professional. It assumes even greater significance in a startup-investor relationship because the two sides constantly need to work alongside each other through the startup’s journey. Any discomfort between the entrepreneur and investor is an obvious indication that things may not work out in the long run, and it, therefore, makes sense to part ways before things take a turn for the worse.
No surprises please
Once the term sheet is signed and the due diligence process begins, the investor will spare no efforts to validate all your claims about the product, scalability and the marketplace. It is therefore best to be completely transparent with the investors and give them the real picture of the business – no undisclosed or concealed facts! The simple rule here is – ‘NO SURPRISES’, since basic trust is what the relationship is built on.
If the due diligence process reveals any unfavorable surprises, consider the deal gone, because trust once broken cannot be restored.
Violation of Non Disclosure Agreement (NDA)
Usually, an NDA is signed between the investor and the startup to ensure that neither party discloses any ‘inside information’ or confidential information pertaining to the deal to a third party. If such a violation occurs the aggrieved party can pull out from the deal, because, both, ethically and legally, the sanctity of the relationship is in jeopardy.
Many a times, a deal can break if the investor is approached by another startup in the same category and if they smell a better ROI from them with lesser effort and money.
It can also happen if the market dynamics of the domain in which the startup operates changes drastically. For instance, a change in government policy could change the dynamics of the marketplace. Another situation could be if a competing company lands an even bigger deal or comes up with a disruptive technology/innovation that alters the prevailing market conditions.
One should understand that, inherently, the investor-startup relationship is different. And it should be kept sacrosanct. An investor's primary objective is to invest, grow his/her money and get good returns. Therefore, no matter what, an investor will always be on the lookout for a better ROI and an exit strategy. For an entrepreneur, it is much more about his/her passion and dreams. However, both points of view need to coexist to make the relationship successful.
Getting an investment does not come easy since the expectations are high on both sides. Nobody wants to feel shortchanged at the end of the day. What is important is to understand that just like any other deal, things not materializing, or not fast enough, is just a part of the game. It is, therefore, important to part ways on an amicable note rather than hold grudges against each other, and feel bitter about that experience. After all, it is a small ecosystem and you are likely to keep bumping into each other, whether you like it or not.
Also, don’t let it dampen your spirit because if your idea is truly ‘brilliant’, it’ll not be long before you find another investor who’s willing to pump in money into your venture.
About the Author: Vikram Upadhyaya is Chief Mentor & Accelerator Evangelist at GHV Accelerator
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- Corporate finance
- Vikram Upadhyaya
- Financial ratios
- Investor relations