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BW Businessworld

Breaking The Golden Rule

Creating value in early stage businesses is primarily the responsibility of the founders

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Remember the Golden Rule,” sneered an investor soon after putting his money into a startup.  “I have the gold and I make the rules.”  Not surprisingly, the investor lost most of  his stake.

This incident, admittedly, happened in London not Bangalore.  But I am reminded of  it often when I deal with investors in India, too many of  whom appear to follow the Golden Rule by demonstrating the arrogance of money and scant understanding of  building a business.  

I thought of the Golden Rule last week while on a call with the managing partner of a seed fund.  We were discussing a follow-on investment into one of  his early stage companies.  I thought he would prioritise a premium valuation given the early promise shown by the company.  

Instead, his key point, stressed thrice, was that any new round would need to ensure that the founding team was treated well and remained fully incentivised.  In my experience of  StartUp India, this sort of sensitivity to the interests of founders is rare among venture funds.

Investors, of course, are in business to make money.  If  they run a fund they have a fiduciary responsibility towards their own investors, the Limited Partners (LPs).

They have a governance role, whether as shareholder or director, to challenge and oversee the activities of the company.  

Many founders are inexperienced and need guidance and some, by their very nature, are egocentric and difficult.  A few find it hard to distinguish their own interests from those of the company and its shareholders.  We have witnessed some terrible failures of governance in early stage companies in India.

So, I am not arguing that investors need always be nice to founders.  Sometimes the legitimate interests of  investors and founders can diverge and shareholders and outside directors need to act tough.  Any good board will have occasional disagreements on matters requiring business judgment.  On some issues, especially when ethical or legal issues are resolved, boards cannot compromise.

The investor’s role in managing and supporting a founding team in a young company can be a challenging task.  It requires hard work, insight, empathy and evolved interpersonal skills.  Striking the right balance between challenge and support of  an executive team is not easy.  

While some investors get it right by being smart or intuitive, for many it comes only with experience.  

In international markets funds often add this skillset to their mix by hiring people with deep industry experience or who have been founders themselves.

In India, it seems that the majority of staff  in funds come from banking or consulting backgrounds and few, with stellar exceptions, have run businesses themselves.      

Saurabh Srivastava, co-founder of Indian Angel Network, and a former entrepreneur himself, told me that IAN has achieved an IRR of 40 per cent over eight years.  

He argues that this superior performance has been achieved not only by  rigorous deal selection but also by the close involvement in each investee company by an
angel investor with deep relevant experience.  

Creating value in early stage businesses is primarily the responsibility of  the founders and their teams.  But investors have a role to play also.

Those who believe in the Golden Rule and demonstrate the arrogance of money deserve to join my investor in London in underperforming dramatically.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Alan Rosling

The author is an entrepreneur and strategic adviser. He co-founded Kiran Energy and was earlier an Executive Director of Tata Sons. He was a Special Advisor to the British Prime Minister during 1991-93. He now lives in Hong Kong but is frequently in India. He is the author of Boom Country? the New Wave of Indian Enterprise.

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