As a former entrepreneur myself, I am empathetic to a particularly difficult dilemma many early stage companies face on a fairly regular basis – how to reconcile business goals developed by the management team with those articulated by the company’s investors. So what does this mean exactly and how does it manifest itself?
CEO of a start-up (who happens to also be the founder) has decided that a set of goals are best lined up 1-2-3, that is to say that the order in which the goals are achieved is meaningful. The CEO’s experience and intuition says that she can’t really fully meet goal 2 without 1 and 3 without 2, and, in fact, if she does them out of order, it may compromise the outcome of each goal (i.e. rushing certain strategic deals to conclusion might compromise the terms she can get from those arrangements). On the other side of the table, the investors have made it clear that without goals 2 and 3 being achieved by a certain date, it will be difficult to raise a follow-on round of financing at attractive terms. These milestones are the most important, in the investors’ eyes, to showing that the business model really works.
So there in lies the rub – the CEO’s intuition tells her that rushing goals 2 and 3 without knocking out 1 will, over the long term, be a bad decision for the business. But without further funding, predicated ostensibly on satisfying the investors’ desire to see the goals met in a different order, the company will lack the needed capital for growth. What’s an entrepreneur to do?
{ 4 comments… read them below or add one }
Andrew Watson 09.09.09 at 3:10 pm
I think this dilemma illustrates why it’s so important for the entrepreneur and the investors to have a team mentality.
A good investor adds more value than just the capital infusion and “gets” the business. Hopefully the CEO and the investors can discuss their priorities and find ways to align their incentives better. If not, life for the CEO is going to be very rough and the investors could miss out on returns.
If you get the right investor, they trust you to know your market, your product and your customers. They know where they can add value and they know that if they “pull rank” too many times than the founders’ fire in the belly will die a slow death.
Fred Wilson, Mark Suster and others have been blogging about issues like this lately - allowing founders to take money off the table, ownership issues, founding issues, term sheets etc… I think your dilemma dovetails nicely into that larger discussion.
Jason 09.10.09 at 7:05 am
Interesting comments, Greg. I can certainly appreciate the tension inherent in the competing interests of various stakeholders in a business ventures. Can you provide an example that illustrates this tension in action? I get your point, but a real-world example (with identities protected, of course) might make this even more fun to chew on and a little less esoteric. Also, what types of founder goals routinely end up in tension with those of investors? Can a pattern be discerned?
Marks 10.16.09 at 8:11 am
Greg: can you tell us what company you started? I think it would be interesting to hear that. thanks
Greg Foster 10.18.09 at 8:36 pm
Company was called Southern Direct - e-commerce platform and process outsourcer for cable networks.