I had lunch recently with one of our portfolio CEOs, and he said something that really caught my attention.  I had just commented on how well they were executing and the quality of the team he put in place.  He thanked me and said that he was really proud of the team, the culture, and how hard everyone was working.  Then he said “but it really doesn’t matter, unless we win.”

 

I think that comment sums up the key tension between founders and their investors and is somewhat unusual to hear from a founder.  When I was a founder, I remember feeling extremely deflated when my investors would point out that we were behind our plan.  We were working so hard and making progress.  I always felt that the investors didn’t appreciate our blood, sweat, and tears; despite the speed not being as planned, the progress didn’t come without amazing effort.  I was right that the investors didn’t really appreciate it, but didn’t consider that maybe they shouldn’t.  The hard work is table stakes.

 

Winning in entrepreneurship is really hard.  The second a founder takes venture capital funding, they are signing up to deliver improbable outcomes and the definition of winning becomes way more ambitious.  The investors are betting on an outlier business and the founders shouldn’t take the money unless they believe they can and want to build that type of business.  By definition, there are very few outliers and the odds are against the company.

 

The investors spend their time thinking about whether the company is winning and what it takes to win.  Typically, the founder cares even more about winning than the investors, but founders also care about many other intangibles including passion, a great team, a great culture, hard work, engaged customers and lots of faith.  Investors care about all those things as enablers of winning, but not as ends themselves.   Seldom do investors put money in companies prioritizing passion over economic expectations.  If the company fails to meet expectations, the inputs ultimately provide little solace to anyone involved.

 

When things aren’t going as planned, the founder naturally takes pride in everything the team built and all the intangibles that have been created to pursue the outcome.  As tough feedback comes from investors, it is natural for founders to be defensive and emphasize how much has gone into the business.  I certainly felt that way during our more challenging moments.

 

From the investor viewpoint, none of it matters if the company doesn’t win.  Understanding this difference in perspective is the key to overcoming the natural tensions between investors and founders.  Some founders, like the one I was having lunch with, seem to innately understand this better than I did when I was in the same seat.

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