When your startup fails: Managing investors

  • Telling the 3Fs (fools, friends and family) tougher than institutional investors
  • But all have a right to know of challenges before even reaching this stage

When your startup fails: Managing investorsIT’S no secret that most startups fail, but what needs to be talked about is what happens when they do.
 
It may take less time to dismantle something that only existed for a few months or years, but it shouldn’t take away from that fact that it can be a painful and difficult process – especially when you’ve got investors involved.
 
I found myself thinking about this after a chat with Jason Gan of Penang-based Tribeup, who shared that his first venture, which I had written about, had been shuttered and he has since moved on to other projects.
 
I initially thought that letting go of staff would have been the toughest conversation to have; after all, these are the people who bought into your dream and agreed to help you build it.
 
But for Gan, it was the conversation with his investors that proved the most difficult and in his case, funding was raised via private investments rather than institutional investors such as venture capital firms.
 
“I believe many startups would think that their idea will change the world when they raise, and never think of the ‘what if’ – I didn't,” he said.
 
Curious about how the ‘money-side’ deals with this issue, I approached Chun Dong Chau, partner and head of research at Crystal Horse Investments Pte Ltd, a venture firm that focuses on early-stage funding.
 
When your startup fails: Managing investors“I think it is always harder to tell the 3Fs – fools, friends and family – than professional investors, whereas with the latter the money is seen less emotionally. Also they might, or should, understand the risk of the business better than the 3Fs,” he said.
 
Chau believes that too many entrepreneurs out there don't understand the value of capital.
 
“Too often we have seen entrepreneurs differentiate capital from tax-payers (grants they have received) and money from an investor’s pocket or fund. We very often question whether the entrepreneur would spend the money he received the same way if it was the money from his own pocket.”
 
Asked about the typical process involved when a startup is failing, Chau said that this depends on how the investor manages his investments. If an investor is very hands-off and doesn’t even receive regular updates, it would be tough for an investee entrepreneur to convey that message.
 
“We are often very aware of the situation of the company and try to ‘save’ the business by having more frequent meetings during those stages and see what can be done at the operational side to turn it around,” he said.
 
Chau thinks the biggest mistake entrepreneurs make is underestimating how much it takes to turn around the business.
 
“Very common cases are where entrepreneurs think that they just need a little more money to give them an additional one or two months’ runway to save the company.
 
“Also, closing down a company takes time and money, which is very often underestimated,” he added.
 
When your startup fails: Managing investorsAsked about lessons learnt from his experience, Tribeup’s Gan (pic) said that being realistic is important and that expectations must be clearly set from the beginning to prepare for the worst case scenario.
 
“I think my point is not about smart money or dumb money here, but rather the value potentially added to the team apart from money. Startup founders need partners, all sort of partners, and money is the last thing to worry about when you have awesome people helping you,” he said.
 
Chau echoed that sense of comradeship, noting that it is important for founders to keep their investors informed – in fact, they must.
 
“Tell all shareholders as soon as possible about challenges you are facing – this sounds obvious, but is hardly done in reality.
 
“Not only do the shareholders have the right to know, but the network of a bigger group of people might help you overcome the challenges as well,” he added.
 
For investors, Chua had this advice: Request periodic updates of the status of the company, not only on the business side but also on the cash flow side. Ask for monthly management reports. Actively ask the company what challenges they are facing and try to help out there if possible.
 
“Every startup has challenges – don't buy it if founders say that they have don't have any challenges,” he said.
 
For Gan, with his current venture Printit – a service that allows users to order photo printouts direct from a mobile app – gaining some traction, he’s embraced a new paradigm of building a business.
 
“I'm a believer of bootstrapping now. If possible, build revenue from day one; don't get too obsessed with product, and neglect sales and marketing.
 
“I mean raising money is not the only business model. Startup founders are supposed to be problem solvers; so we should be able to solve our own money problem, no?” he said.
 
Sometimes, all it takes is a failure to close out the introductory chapter of what hopefully ends up being a very, very long book on entrepreneurship.
 
This column originally appeared in the Metro Biz section of The Star and is reprinted here with its kind permission, but this will be the last instalment of Gabberish on DNA.

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