The Toxic Investor

Posted on Posted in business, entrepreneurship

Robert_Bob_LaGarde-toxic_investorEntrepreneurs seeking start-up capital often look to early stage investors as validators for their vision and business acumen in addition to their value as financial supporters critical to the venture’s growth and survival.   Thus, early stage investor may have a substantively different type of influence on the founder and the company. Unfortunately, in many cases, such early stage angel investors may be friends, family members, or local business executives with little to no experience in mentoring a founder of his company’s product, market or business strategy.  Even worse, the investor may believe that he or she is an expert and mistakenly assume that they know better than the founder and his team what the company should be doing.

Founder CEO’s are sometimes stereotyped as hard-headed and egotistical or nerdy and ill-informed about real world business dynamics. In truth, however, the psychological dynamics at work with early stage start-up founders are often more by fear and uncertainty – leaving founders vulnerable and less likely to question or challenge bad advice or misguided influence.

It’s critical that early stage investors understand this sensitive psychological state of affairs and manage their interactions and influence with the founder and the company with appropriate care.   By nature, the early stage start-ups are working are generally working with unproven products or services and uncertain market validation. It’s easy at this stage of the game to be distracted or diverted in unproductive directions.  Early stage investors would be wise to consider supporting and encouraging the momentum of the founder and the company as their first and foremost responsibility.  If they question the founder’s ability or the direction of the company’s business plan they shouldn’t be investing.  Just as in marriage, parties shouldn’t tie the knot based on a belief that they’re going to change one party after the fact.

Equally, founders should be particularly alert to the nature of interactions with the early stage investors. If an interested investor has more interest in what you’re not doing than in what you are doing, then tread with care. Similarly, if an investor takes a never-ending interest in the details of everything about the business – that’s not necessarily a compliment.  Such distractions can be costly in terms of both time and focus.

Worst of all, an early stage investor who routinely challenges every move the company makes will quickly suck the wind from the sails   Founders forced to defend their plans and actions at every turn are not only distracted from productive activities, they may find their confidence undermined and their vision clouded.  And finally, succumbing to the demands and advice of an ill-informed investor may risk tanking an otherwise promising new venture.