GUEST BLOG. How many companies are falling right now due to the pressure from their investors to go faster and faster? The number is scary! Right in my tight network, I know of three promising start-ups that have burned their capital too quickly and will likely have to close their doors soon.
This led me to ask myself a key question: “do we need to grow as fast as our investors would like”? My point of view today: I don’t think so.
“Don’t worry, Dominic. We will support you, “” Simon “(not his real name), one of our investors, told me after a board meeting. Simon wanted us to go faster than expected. We were not” ambitious enough “despite our proposal to double our income over the next two years.
And Simon really meant what he said. At the time he was telling me that he would continue to finance us if we needed more money.
This was also the case, in the midst of COVID, it recommended accelerating product development and sales to be very well positioned to come out of the crisis by putting back capital. It is mainly this decision that makes Connect & GO one of the key players in the tourist attractions industry today after only four years in this industry.
During our latest loan, the management team decided to slow growth a bit to protect their cash and to make sure we don’t run out of money before we hit our targets. We warned our investors that we would not need any new liquidity until the end of 2023, which gave us some independence.
Investors don’t want you to ask for more money fast, but they want you to go fast.
Quickly, we saw that the end of the COVID-19 health crisis presented a number of opportunities and that there was an opportunity to move much faster.
We therefore presented our investors with different scenarios: either the status quo, a very quick return to profitability (with a block to growth) or even going full throttle faster.
What was the choice of investors: accelerate now. However, this obviously would have affected our liquidity. It was clear that a new down payment would be needed, quickly. On the one hand, our investors want it to accelerate now, on the other hand we hadn’t even started discussions on the conditions for future financing.
If I had listened to myself, I would have accelerated on the pitch (bad idea as you will see later). My most conservative COO will refuse to make most of the hires “until the check is received”).
The discussions did not go as fast as required, I had to warn the board that we would not reach the objectives if the loan was not closed within two weeks. All this allowed me to quickly close the loan and start the new growth plan. But it could have been very different.
Your goals and those of your investors may differ
You need to understand the motivation of your investors. Venture capitalists invest in multiple companies at the same time.
For a venture capital fund investment in your business to be “very attractive”, they need to earn at least 10 times their share. In other words, if you don’t become a multi-million dollar company, you are unlikely to have any real influence on the performance of your investment fund.
That’s why your investors could always push you to go faster! This is not a Machiavellian plan to increase their ownership. It is simply in the interest of the investment fund that you hire more engineers, in order to introduce more products, faster, thus increasing your income and valuation. A company that stagnates for an investment fund is automatically seen as a loss.
You should do what you feel is right, not what your investors are pushing you to do.
If, as in the case of Connect & GO, the result of the investment leads to a very rapid increase in revenues and customers and in the valuation of the company, it is great. But imagine the opposite case with revenues not growing as expected, say … due to a recession? And that you fall at a time when new liquidity is needed, but given the context you are unable to raise more. You will then be just another “failed” investment for your venture capital fund.
From then on, your fund will only focus on the other investments in your portfolio – you will be forgotten! As long as some of the fund’s investments turn into unicorns worth billions, the fund managers will be very happy with their returns and will soon forget your bankruptcy! Hence the word RISK in venture capital!
Unlike the investment fund for which your company is “just one of its investments”, for the founders it is a matter of life or death. If the business fails, the investor will lose his marbles. But entrepreneurs, who often act as personal guarantors for bank loans, don’t have all those other assets to lean on like an investment fund. Very often the entrepreneur has all the balls in one basket: his business!
It is for this reason that you have every right to think differently from your investors on the best way forward.
We will support you
I recently talked to an entrepreneur friend about his scale-up situation. Having experienced tremendous growth during the pandemic (being in the field of medical technologies), his investors asked him to very quickly accelerate his hiring and growth of him despite the cash flow risks. His investors reassure him by saying “we will support you”. We try to be transparent, “we support you” does not mean writing a check.
When it came time to ask for the check, the business environment had changed, growth had slowed slightly and the cost of capital had risen. Result: the company had more than 3 months of cash and its investors did not support it!
Looking back, my entrepreneur friend should never have made a single hiring before he got the check. His answer should have been, “Great. Hiring more engineers will clearly reduce our cash flow. Can you confirm when we get your new financing offer and your check?
Instead, he naively thought he had the “forever” support of his investors and burned all the company money to go faster!
As a result, the fund suffered the loss (selling the company for the value of its preferred stock) and my entrepreneur friend lost everything.
Think about this story before doing what your investors tell you to do. Do what is good for you, for the company and if you have a good investor, also for him, but not at all costs!