Thursday, September 5, 2013

The WRONG investor

You might say that there is no such thing as a wrong investor. After all, any business needs money in order to survive. So who really cares where the money comes from? Well, you are right, obviously, and at the same time you are dead wrong! Confused? Then keep reading, it gets even better!

Let's take, for example, an intelligent, smart and generally nice - and don't forget good looking - serial entrepreneur. He has established a number of companies already, mainly in the aviation industry. Just to give him a name, let's call him Alex.

Now Alex has really done many things right in is illustruous career as a serial entrepreneur. He has managed to personally and professionally challenge himself on a daily basis, he has made a name for himself within - limited - industry circles, and - probably most importantly of them all - he has managed to keep his family not only well fed but also happy with his professional lifestyle! What he has never successfully achieved, though, is to find the ideal investor for his various businesses. Now, I am not talking about his one-man shows in the service industry that requires only minimal capital and where the funding was usually supplied by Alex himself. I am talking proper airlines, requiring big bucks.

Alex has found an tried them all: institutional investors, private investors, larger numbers of investors, just a few of them... it always turned out to be a less than perfect marriage. "Now stop complaining", you will say. "At least this Alex chap found himself money for his businesses. We, on the other hand, have tried to do unsuccessfully, unfortunately, so he really should consider himself lucky"!

And of course, you are right. Without money, no business. Without business, no income, Without income, one unhappy family!

But look at the aspect from a different perspective: As an entrepreneur, you have put limitless efforts in your business idea. You live, breathe, and dream the venture. You know that the company will succeed because, well, it is just a splendid idea that the world is impatiently waiting for! And as a consequence, you do expect that any potential investor buys into your fab idea mainly because he feels the same way about it. The potential investor thinks of you nothing less than a hero who is here to serve the community. He will put in his money, sit back and waits patiently for you to get him his promised return. Simple. And any entrepreneur's dream.

Reality is different though. As you might have found out during your fund raising sessions, the first question is always: "how much"? Good for you if you actually started your presentation about the required capital and not about the business concept. This way, you saved yourself probably many, many rounds of painful discussions.

Any investor, be it a VC, a private equity investor, or any other money investing organization with usually a fancy address in New York, London or Paris as its head office, is interested in one, and one thing only: RoI. True, the fund or private individual might have a scope that dictates certain 'greener' or other society beneficial investments but in the end these funds need to deliver the results to their clients the same way as a conventional investor needs to do. No investor will accept a capital leak under any circumstances. Period.

So what does that mean for Alex and you as an entrepreneur? Well, to put it simply: interference. Interference by the board in operational matters that goes above the mandated supervisory board duties. At best it means a drilling of the company's management team during the regular board meetings with some advice that is expected to be adhered to, at worst it means a CXO - often in the form of a board member - supplied by the investors. After all, especially in the case of an airline, the investors trust the entrepreneur with a considerable amount of money and they would like to be updated of the company's cash-flow regularly and preferably 24/7 in real-time. And what is the next logical step after receiving the intel? Correct. Act on it! And I do not even blame them. If it were my money, I would probably feel the same!

Yet, what investors do not realize is that such behaviour is counterproductive to the company's efficiency and thus its income and bottom-line. Any outsider has per definition only a limited knowledge of the company. He might be a trusted professional in the company's industry but he certainly is not an expert in company internal matters. After all, you, as the entrepreneur, established your business idea on a niche market concept, right? And I doubt that the CXO cum board member has been studying this niche just as you have done over the last few years. And with limited knowledge arises disaster, as any Captain is more than willing to tell you about his First Officer.

Now, in all fairness to the investor, there are two sides to the medal. The entrepreneur - often quite rightly - considers himself the expert and expects anybody else to respect his expertise while the investor has constant second thoughts about his investment strategy - and quite honestly, who wouldn't? - and would like to take an active role in the running of the company since it is a human trait to consider oneself the best in its field and the field of an investor comprises of the world, or so he likes to think. These two sides are obviously not compatible. Even a good ole Swiss compromise would only be beneficial to the company, and thus its generated profits, if the interference comes in the form of a perfect match to the company's culture and knowledge basis. And, by the way, and Rudolf really has a red nose!

So, what is he solution to this dilemma? Well, one obvious possibility would be to start companies that require a cash amount that you are able to provide yourself only. It might not be very practical but this solution comes with an added advantage: if something goes wrong, you only can blame yourself!

However, it would be a sad day if an entrepreneur can only succeed with concepts that require a capped amount of cash instead of ideas that he believes in. So here is my advice: if you find that your potential investors like the financial gains you promise them but are not interested at all in your product, say politely 'thank you for your time' and look somewhere else. Also, if your potential investor has a little knowledge of your specific industry, prepare an executable document that specifies the exact roles of the investors and their representatives. If your investors do not want to sign this, walk away! Remember, a little knowledge is a dangerous thing. And obviously, if your potential investors try to divert your idea to a path you do not believe in or you even have moral objections to, thank them for their time and call somebody else, right now. I mean it, right now!

The idea of turning down hard cash might be a frightening one but believe me - I mean believe Alex, of course - he has been there when interference of a shareholder resulted in the collapse of an otherwise very valid business model. And the legal consequences of such a mess usually take all the entrepreneur's time that he rather should spend on a new business concept! Believe me, I, err Alex, has been there!


  1. Finally somebody who says as it is! This is never taught in MBA101.

  2. I agree. The problem would be easily solved by a specific agreement before jumping ship but in all fairness, when setting-up a company and all the corresponding paperwork this is the last thing you would like to worry about.

  3. aboobacker_moidu @yahoo.comMar 21, 2014, 10:20:00 PM

    excellent and really practical thoughts.... well done mr. Alex....agree with you airline still are following traditional methods on communication and spending hell a lot while industry giants and regulators do not stop them or suggest openly fearing their revenue generation .....
    this is where right consultants benefit airlines or you call him Alex....err or myself...try it out with guarantee...Aboobacker Moidu