Stories about Startup Founders being misled by Investors, diluted out of their company equity share, and even sued by the people who backed them in the first place, are not rare in the Venture Capital ecosystem.
The Founder-Investor relationship is complex, and those stories add to generational mistrust between Founders and their Investors, limiting opportunities for value creation for both parties. Of course, most Investors and Founders try to work in unison, but the alignment of interests is often less than perfect.
Founders want to focus on their product and the vision they have for the company. They are the ones that came up with the idea, spent days and nights developing it, took on multiple roles and responsibilities from the get-go and sold the idea to their first team members, and later — Investors. This journey leads Founders to personify the company and be very protective of the company, for example, openness with information, especially if the trust between themselves and Investors is yet to be built; who could blame them?! Founders take risks like no others and put everything on the line for the business they are building and unconditionally believe in.
Venture Capital Investors are interested in returns, fund metrics and their duty to their underlying Limited Partners to return a profit. Furthermore, the usual structure of a Venture Capital Fund has the Management Team almost constantly fundraising or managing LP expectations, so the attention is drawn to the performance of the fund and portfolio companies from a metrics point of view, instead of supporting the Founders and getting them equipped with the resources for sustainable growth of value. This LP focus minimizes the time that could be employed helping the portfolio companies grow and addressing their needs, building the relationship with the Founders and really positively influencing the success of the Startups with the vast experience of a world class Fund Team.
Both Investors and Founders end up being pressured into delivery of certain numbers and metrics, instead of focusing on developing good products and building successful Startups. So, it is not a surprise that the relationships between Founders and Investors can turn sour, creating mistrust and limiting the ways that the relationship can be used for making better decisions and finding a good Founder-Investor fit.
Just like any other relationship, communication and transparency is key. Therefore, it is crucial for Founders and Investors to find mutual ground and align their interests to enable trust. Both parties must trust in the other’s ethical behaviour: Founders should feel confident communicating any news (especially bad) to Investors as early as possible, as well as sharing crucial and honest data. Investors should spend time with Founders understanding the business in order to make themselves effective and set realistic targets to ensure the Founders feel safe in sharing any news (especially bad).
Moving away from the current Linear Economic model and into a Circular Economic model will build synergies by aligning interests of all parties involved for long term prosperity.
The Circular Economics approach considers the Founder relationship as a resource that is intended to be kept in the cycles for continuity and productivity improvement.
Using the Circular Economics model minimizes the need of the Venture Capital Management Team to fundraise and frees up the time that can be used to truly pay attention to Founders and their products, figure out what they need to move forward, and give them those resources, adding value. This approach gets the Founders and Investors back on the same page, building long-term relationships and trust — both with Founders of any current portfolio companies, and the new Founders pitching their business in efforts to raise money who haven’t worked with a Fund Team previously; Founders telling other Founders of their experience is the greatest validation of a positive relationship.
Kavedon Kapital pride themselves in applying the Circular Economic model across every aspect of the business — internal, external and anything in between. We strive to be approachable, fair and transparent.
If you are interested in how Circular Economics can make your life better as an Investor or a Founder, please reach out to our team.
Initially, as part of the founding team in a start-up in Hong Kong, Ieva was responsible for product management, fund raising and IP. During the last 4 years, Ieva has worked as an Investor Relations and Investment Operations Associate at an Asset Management firm in London and at Truesight Ventures, as an analyst focused on different pre-seed and seed stage companies, carrying out product and market analysis.