Michael Redd
A dark cloud is forming on the horizon for startups and investors. Big firms have announced they’re cutting back on investing in startups; Y Combinator is advising founders to extend their runway; and top venture capitalists are preaching that startups have to survive before they can thrive.
While it’s easy to get bogged down by the prevailing doom and gloom, investors have to stay focused on what matters most: founders. The state of the world is going to make the people at the helm feel nervous and seek extra support, especially from their investors.
We’ve been seeing a shift toward value-driven investment for a while, and now is the time to put your values into action. Naturally, investors will have their own issues to navigate, but losing sight of founders’ needs will cost more down the line.
Investors now have to demonstrate consistency, transparency and longevity more than ever. They have to prioritize people, not profits, as the downturn takes hold. Below are a few tips on how to best help your founders through this rough patch.
Consistency: Be the investor your founders are familiar with
Your founders chose you because of what you bring to the table, including your experience and how you communicate. When the road gets rocky, you should reassure them that you’re still that person.
Unexpected changes in your behavior could scare founders and make them feel like you don’t trust them. If you’ve adopted a hands-off approach and encouraged them to make their own decisions, don’t suddenly begin micromanaging. Likewise, if you normally only check in with them on a monthly basis, don’t start requesting weekly meetings.
Judge the amount of interaction that will best serve your founders. One of our companies is currently closing a round, and rather than chase them for updates, I messaged the founder simply saying, “Hey, I know this is hard. I’m here if you need me.” I put the ball in their court if they need to reach out.
Be careful not to deviate from your normal patterns of speaking, but at the same time, don’t hold back on sharing your experiences from previous downturns if founders reach out to you for help. Anecdotes about what worked and didn’t in times of hardship, in addition to what carried you through, can comfort founders who are new to downturns.
I know that when I started my investment career after the ’08 crash, hearing accounts from people in the space helped me have faith that crises are temporary.
Transparency: Make sure bad news comes before good news
Tough decisions are an unavoidable reality of downturns. If you have to share bad news with founders, do so immediately. At my firm, we go by the philosophy: Good news can wait, but bad news gets communicated on the date.
Be upfront with your founders about the economic factors of portfolio balancing. Be conscious not to give excuses or justify the news; rather, simply state the facts. If you’re working with more seasoned founders, they’ll likely understand and accept your logic. First-time founders, however, may need a deeper explanation of the external influences and contingent operations.
If the circumstance requires more details, don’t be tempted to compensate for bad news with empty promises — you’ll increase the risk of both you and the founder getting hurt in the future.
Once you’ve given bad news, pause and let the founders respond. Judge if it’s appropriate to give them advice about next steps — for example, if they need to conduct layoffs or stop a service. You could also connect founders with coaches, run role-play scenarios with them and proofread any team communication.
Along the way, remember that the support you offer should be something you can provide on an ongoing basis in the long term. Any “special measures” shouldn’t only be available in response to bad news.
Longevity: Treat founders like your future business partners
Investment is a long game, which is why investors tend to think in months and years. But founders are rooted in the day-to-day. This discrepancy can quickly cause friction when capital flows falter.
Shift your approach to align with the granular goings-on. Ask founders what their calendar is looking like: Are they overwhelmed with meetings? Do they have time for their family and friends? Are they getting enough sleep?
Home in on the human element of business and their daily well-being. If they’re going into emergency mode, that won’t be sustainable, and they’ll swiftly burn out.
These tough times also present an opportunity to build more meaningful relationships with your founders. As an investor, you see your founders as people you want to invest in again and again, but how you react and treat them in a downturn will determine if they will want to continue working with you.
The people you can get through sticky patches with will be confident in your skills and will advocate for you. That means you’ll not only be a natural choice for their next funding rounds and future ventures (maybe even at more favorable terms), but they’ll likely tell other founders and actively contribute to your deal flow.
Austerity calls for investors to be more attentive to their founders, and that will only serve to improve relations. The downturn is a moment to step up, manifest your value as an investor, and prove that you’re not just behind your founders, you’re facing the same challenges together.
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