Platt Perspective on Business and Technology

Startups and a word that divides them – investment

Posted in startups by Timothy Platt on November 8, 2009

The playwright George Bernard Shaw is known, among other things, for having claimed that “England and America are two countries divided by a common language.” Startups manage to slice and dice that potential for confusion a lot more finely, and particularly where some of their key words are concerned. One of the most important for this is the word “investment.” The problem here is that multiple constituencies use this same word but in very different ways, with all referring to that same basic concept of buy-in and of developing a stake and a voice in the startup. The fact that their end-goal in using the word is pretty similar does not help when all their approaches as to how to get there differ. And this causes avoidable friction and problems for the startup as a whole as well as for the people involved.

This is going to be a fairly short posting given the topic choice, as I am primarily just going to catalog some of the meanings that different people and groups bring to the table, for this overstressed word.

Founders tend to look at investment from a cash perspective, and especially as they start to plan out the budget and finance sections of their business plan and look at the cost areas they have to address, and pre-revenue. Investment to them means helping to pay those bills and keep the startup alive as it sets out to launch and bring in its first revenue – and after that as it seeks to reach the break-even point where revenues meet expenses.
Employees see investment as time and effort contributed, and definitely when everything is pre-revenue and everyone is working for the potential of future compensation and earnings potential – nothing coming to them now or for the foreseeable future. When their voice and perspective is not taken seriously for what they see as their contribution’s monetary value there is opportunity for real misunderstanding and conflict.
Consultants see startups for their longer term investment opportunities but experienced consultants also see a need for at least some compensation now. I have negotiated some-now/some-deferred terms and that is probably fairly common for consultants who work with startups and early stage. I would be more likely to go long and take more as deferred, possible compensation if I felt particularly strongly about the potential for the business to succeed, but I would still prefer some compensation up front. This creates potential conflicts both with the founders as they seek to limit the red ink, and with any non-founder employees who tend to take compensation as promissory notes, payout based on future business success if any.
Angel Investors (and Venture Capitalists if this enterprise gets that far): These are people and groups who enter into participation in a startup or early stage because they see it as meeting some fairly hard-nosed investment risk liability criteria, and because they see significant potential for a return on their investments. Angels tend to buy in earlier and for smaller amounts and VC tend to hold off until there is more in place, and they tend to invest more. And a part of what they want as surety, and particularly for the Venture Capital crowd is control. They are the people who insist that the business needs a CFO, for example, who meets their standards of professionalism and practice and for a business at this stage in its development. They invest with money, which aligns with the founder’s definition of “investment” but they do so with strings attached and in ways that the other groups generally do not and they generally do not buy into the dream and the emotion behind that new business that helps motivate founders and non-founder employees.

These groups all use that word “investment”, but they place different meanings on it and they put different requirements on the table that would be needed for them to make an investment. The problem is that this is almost never discussed and even just by the founders together amongst themselves so they can prepare for what is ahead. That failure to effectively communicate about this opportunity for misunderstandings is something that effective due diligence on their part would correct. Founders should look ahead for possible areas of misunderstanding and for areas where differences in priorities and time table requirements can appear. Thinking through this word and how its meaning differs for the people they have to work with is a good starting point for this type of analysis.

Tagged with:

One Response

Subscribe to comments with RSS.

  1. […] pivotal issue – compensation. I touched on this for startups and consultants in a recent posting: Startups and a word that divides them – investment. That posting addressed something of the potential for conflict and misunderstanding between […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: