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Rediff.com  » Business » Investors vs founders: Best ways to handle conflict

Investors vs founders: Best ways to handle conflict

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August 10, 2015 12:28 IST

The Housing.com controversy may have represented an extreme example but disagreements between investors and founders are a reality in the world of start-ups. What's the best way to handle them?

Image: Relations between founders and investors in the start-up universe remains as tricky as ever.
 
 

Reverberations from the spat between Rahul Yadav and investors in Housing.com, the real estate portal he co-founded in 2012, have only just settled.

But the range of reaction on social media suggests that issue at the centre of the controversy - relations between founders and investors in the start-up universe - remains as tricky as ever. 

Yadav's case may have been extreme but both venture capitalists and entrepreneurs admit that making the relationships work demands considerable emotional capital from both sides.

"Disagreements happen all the time," admits Vishal Gupta, managing director, Bessemer Venture Partners (BVP) India. That's because of the overlapping nature of the roles.

"When its issues related to shareholders such as the company going public, selling a stake or making investments, both investors and entrepreneurs have an equal say. It's a conversation before coming to a decision. In all other business matters, entrepreneurs call the shots - but since it's a long-term relationship, even investors could have a say in any matter," he explains. 

How can this equation be managed without getting to the point of no return?

 

The issue is likely to gain even more traction given the unique and heady combination of the invariable youth of the entrepreneurs - Yadav is just 26 - and the unprecedented sums of money pouring into e-commerce - something like $725 million of venture capital has flowed into start-ups in the second quarter of 2015, up from $424 million in the same period last year. 

At one level the answer is easy. Just don't do the kind of things Yadav did: engage in a very public online argument with a leading venture capital firm over alleged poaching, attract court cases and, finally, take significant unilateral decisions like donating his shareholding to employees.

"It's not possible to work in an environment where a founder is showing investors the finger," said one venture capitalist requesting anonymity. 

Equally, however, there are those who say housing.com's investors treated Yadav like a "tourist" once they came on board, such as sinking money in an expensive advertising campaign without a commensurate increase in traffic to the website and that became a source of tension. 

Whatever the merits of this particular controversy, it is clear that many of these issues go beyond the very human problems of ego management and involve a fundamental understanding of the roles each group plays in the start-up. 

Image: For the investor to give money is like kanyadaan. Photograph: Reuters
 
 

First, agree to disagree

It starts with acknowledging the basic truth that, as Sandeep Aggarwal points out, "The interest of the two should be aligned to increase shareholder wealth."

Aggarwal is in a good position to understand this. A founder and largest shareholder in ShopClues, an online marketplace, he is now an investor in an anti-ecommerce site shopsity, besides founding automobile start-up Droom.

As he points outs, "Someone has given you the money and is watching your interest. The least you can do is collaborate. And one can always agree to disagree." 

Critical to these conversations is an understanding that investor-founder relationships are for the long-term "Like a marriage, there should be a comfort level with each other and even after the exit, an investor should be able to look the entrepreneur in the eye and have dinner together," Bessemer Capital's Gupta adds. 

There are no hard and fast rules to developing this comfort level but as Gupta points out, both sides get multiple opportunities to do so.

"Nobody writes the cheque after one meeting. You meet many times, have honest conversations, meet the team. But things can still go wrong. There are no ideal questions that can guarantee a smooth sail." 

Though it is obvious that personal rapport is key to the success of a founder-investor relationship achieving this can be tougher than it sounds.

After all, as Aggarwal points out, "For the investor to give money is like kanyadaan. At least the daughter is an adult and knows what to do. If money goes into the wrong hands, it will never come back." 

That is why the temptation for investors to call the shots is often hard to resist. The pressures to keep valuations high may tempt venture capitalists to take short cuts in ways that could harm the business. 

Image: An ideal venture capitalist must play the role of a coach, not a big boss. Illustration: Uttam Ghosh/Rediff.com
 
 

Enter, the mentor

So what role should the investor play? "My ideal is for a venture capitalist to play the role of a coach, not a big boss who seeks a monthly report," says a Mumbai-based venture capitalist whose firm specialises in funding pre-revenue early stage companies. This role not only makes it easier to develop a rapport but, importantly, provides the start-up with sounding board. 

Tarun Davda, director in investment firm Matrix Partners India, sees the investor's role as a two-fold responsibility. "Essentially, an entrepreneur needs us to help with teething issues, and among the biggest areas here is creating a core leadership team since founders are typically young graduates just out of IIT with little experience of building an organisation," he says. 

The second role involves keeping the founder from becoming inward-looking. "When you are building an organisation anything in a start-up that isn't urgent doesn't get done even though it is important!

We need to keep the founder aware of the competitive landscape," Davda explains. The objective is to act as an early warning system for the entrepreneur. He points to the regulatory work Matrix did with Ola Cabs in the early stages so that when the crisis over licensing of the online tax-hailing business arose, the company was hit less than its competitors. 

Mentoring, adds Davda, also means backing off occasionally and allowing entrepreneurs to make mistakes from which they can learn. "It's important not to be overbearing because the reality is that we could sometimes be wrong too," he says. 

Image: It would be safer for the entrepreneur to walk away from the investor than head into a relationship that ends in bitterness. Illustration: Uttam Ghosh/Rediff.com
 
 

Pitch report

Most obviously the success of the investor-entrepreneur relationship starts with the nature of the pitch. Aggarwal of Shopclues speaks from experience when he says, "No preparation is enough. The investor hears 200 pitches in a month, so he knows who's genuine and who's not. He should not be under-estimated at any point." 

His tips for a start-up entrepreneur meeting an investor: "The entrepreneur should bring out his full personality and articulate his business strategy early on. He should present the big picture of the business he's proposing with all the data points such as market size, eco system, competition, money required, with a three- to five-year view. Once you are ready with the metrics, you have an edge." 

Making the pitch, however, should never involve hard-selling yourself, Aggarwal adds. "Never pat yourself on the back even if the investor keeps a poker face." 

Many messages, in fact, can be conveyed effectively through sub-liminal clues. Aggarwal recalls his first meeting with investors for ShopClues. "I was employed with Wall Street and since I had travelled from San Francisco to Mumbai I had little time to prepare. I wanted the investors to see my ShopClues logo, rather than give them my Wall Street card. So I got the printer to have the ShopClues logo on my laptop bag and on the laptop and I got compliments from the investors for that. 

"If I had given my Wall Street card, they would have thought that I may not be willing to leave that job. With the Shopclues logo, I made my intent clear and half my battle was won." (Disclosure: In 2013, Aggarwal pleaded guilty to insider trading in his Wall Street firm, a case that is still being heard.) 

The pitch is also a good way for the entrepreneur to check out the investor too. Davda says he tells prospective entrepreneurs to consider three parameters when they make their pitch. First, assess partner quality. Second, gauge the time and speed required to close the round of funding. Third, weigh the valuation. 

"My advice to entrepreneurs is: please be clear which of these is a priority and make sure your partners are completely aligned with it. I mean, it's fine to say that your priority is to optimise valuation upfront - it will save an unbelievable amount of conflict later." 

In fact, he suggests that if the partner's priorities don't match, it would be safer for the entrepreneur to walk away from the investor than head into a relationship that ends in bitterness.

Kanika Datta & Nivedita Mookerji
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