cart before horse? conditional capital?

Posted by in Investing, Opinions

When you start a fundraise process there is only one guarantee. Not that you will either successfully, or unsuccessfully, fundraise. But that you will be faced with a multitude of, often polarised, opinions.

This can be super helpful, insightful and value-add but also, more importantly, occassionally confusing and disruptive.

I would never give advice in these circumstances other than ‘go into investment meetings with your ears open and take on-board and carefully consider all the feedback and suggestions you are given’. People tend to be investors because they have earned the right to / earned the capital as a result of experience, hard work and talent. Not listening to feedback would be a big mistake – some of the most exciting strategic insights have come from super investment meetings.

The danger, however, is where the cart is put before the horse and insight becomes ‘determination’. Where the management team are tempted to wholeheartedly vary their strategy to fit with potential investor feedback under the illusion that such variation will bring the capital. Call it the money determining the strategy rather than the management team determining the strategy. For me this is fundamentally wrong, we want investors to invest in businesses because management’s strategy is strong and considered. Not for investors to invest in businesses where management team are implementing the investors strategy/requirements. Management MUST be backable in their own strategy (of course not ignoring the fact that that strategy should be amended and influenced by valuable insight) or they are not backable at all.

Where the opinions of potential investors are, as mentioned, polarised then you end up in a situation that quickly compounds. Firstly management rescind control of the strategy. Secondly you end up with different investors looking at the same opportunity but looking at different strategies. Tempting when you are trying to secure that capital but ultimately destructive if/when those investors are bedfellows in the same investment and then surprised that Company A is implement Strategy B and not Strategy C as they thought (and vice-versa of course). It unwinds pretty quickly.

During any fundraise process the business strategy will inevitably evolve through external input. I am yet to see a circumstance when it doesn’t. But the horse must be before the cart. The management team must own the strategy and not be bounced offline by conditional capital.

I’ve said in previous blogs that the completion of an investment round is the start of the journey and not the end of the journey. I would always prefer to take a smaller round of capital coherent with a management led strategy than a larger amount of capital with an divisive capital led strategy. A difficult call. But having worked with multiple start-up companies over six years now, I am utterly convinced that a coherent group of investors around a coherent and considered strategy is the best way to build an early stage company. Management don’t know everything, we don’t know everything and investors don’t know everything. But management must lead.