Angel Investors, VCs and Entrepreneurs - Gaps in Understanding
Why do so few startups succeed?
One of the reasons is the "Gaps in Understanding" between the angel investors, VCs and entrepreneurs – individuals with wildly disparate natures, who have to work together for a company to be successful.
Startups Need Different Types of People
Most entrepreneurs need angel investors or VCs to succeed. Similarly, angel investors and VCs need entrepreneurs to succeed. Angel investors, VCs and entrepreneurs are all part of the same entrepreneurial ecosystem.
Unfortunately, relationships between entrepreneurs, angel investors and VCs often become strained, substantially reducing the probability of success. If you’ve seen, or taken part in, the disagreements between the warring factions of entrepreneurs and investors across the boardroom table, you might think age is the primary source of conflict. While age is sometimes a factor, disparity of experience is most often the culprit.
Vastly different life experiences creates ”gaps in understanding” between angel investors, VCs and entrepreneurs - neither group fully understanding the motivations, economics or time horizons of the other. In the case of a fledgling company, not addressing these gaps in understanding can be fatal.
When I was an entrepreneur I could not understand our investors
When I was an entrepreneur, I just couldn't understand our angel and venture capital investors. Our angel investors were especially frustrating.
My co-founder and I used to go for lunch together and complain bitterly about their meddling. We wished they would just leave us alone to run the business.
It wasn’t until many years later I realized nearly every situation my co-founder and I complained about was an example of our investors working hard to save us from certain failure. It's embarrassing to admit this now, but we fought them every step of the way.
I actually had to experience the same gap in understanding myself, from the other side the table (several times) before the light went on. Ironically, some entrepreneurs I work with today do everything they can to resist my attempts to save their companies – companies I have invested in. Now I finally understand how my investors must have felt all those years ago. The gaps in understanding between me and my investors has finally been closed - twenty years later.
It's Like Being a Parent
Gaps in understanding are familiar to parents - especially those of us with good long term memories. When I was growing up, my parents would desperately try to convey a life lesson I just wasn't receptive to. In the early days, it was things like not playing in traffic. Later, the lessons were often about the value of a good education. In my teens, they were often about people I chose to date or spend time with. I kept wishing they’d just leave me alone to learn myself.
I didn’t understand how my parents were trying to help me until I was a parent myself, trying to convey the same lessons to my children. While I was growing up, the gap in understanding between me and my parents was just too wide – I didn’t understand what they were trying to teach me (or why), and they couldn‘t understand why I adamantly refused their hard-won wisdom.
Entrepreneurs often wish VCs had been entrepreneurs
I've often heard entrepreneurs wishing their VCs had been entrepreneurs before they became VCs. Some VCs have, of course, been entrepreneurs, but many others came from financially oriented educations and backgrounds. Obviously, if all VCs had been entrepreneurs first, they’d have a much easier time understanding the entrepreneurs they invested in.
I Wish All Entrepreneurs Had Been Investors First
Recently, after a particularly challenging interaction with an entrepreneur about saving their company, I found myself wondering (again) why they so stubbornly refused to listen. I realized I was (again) battling through a gap in understanding.
I reminded myself that the entrepreneur had never sat in my chair, or walked in my shoes. They had never felt the frustration of having made an investment, of seeing that investment moving toward zero and knowing how to fix it, but being blocked at every turn – with no way to make the entrepreneur appreciate the solution being offered.
It occurred to me that being angel investors or VCs would be a lot easier, and there would be many more successful startups, if all entrepreneurs had been investors first. Then they could better understand the motivations, economics and time horizons of their fellow shareholders.
I have watched many of my investments go to zero value due to gaps in understanding. I am sure it would help if all entrepreneurs were investors first, but that's not a practical solution.
I believe the best we can do is keep in mind that many times when we are fighting to save a company, or resisting something our shareholders or directors are trying to convey, it’s due to a gap in understanding.