Founders Beware: A cautionary tale

Every new start-up begins with an idea. An idea that gets someone so excited they can think of nothing else but making it work. The vision, the potential, and the founder’s excitement about that idea is what is central to inspiring others to come on the journey with them to make it happen.

But not every founder’s story ends up with them walking off into the sunset. In reality, the desire for speed to market, financial returns, economic efficiencies and scalability from investors can sometimes feel like a blizzard that aims to blow a founder off course.

I recently spoke to one founder, not a FounderCatalyst customer, but a friend, for whom the dream resembled more of a nightmare, finding themselves losing all control of their idea, and ultimately their business. I wanted to, with their permission, share their (unidentifiable) story with you all – as a cautionary tale for all budding entrepreneurs, but with takeaways we can all relate to, and should listen to.

Once upon a time…

First, we meet our protagonist. A recently graduated, intelligent, young budding entrepreneur with an idea. Working with a close friend they developed their idea into one which had feasibility and opportunity. So much so that, based on a prototype alone, was attracting some significant funding.

But when one half of the founding team wanted out, the investors got spooked and backed out. But this didn’t deter our intrepid explorer who went in search of a replacement backer. Little did they know then, but the handshake that followed would see them lose everything they built.

The founder says to me: “The two individuals that eventually invested had everything – experience, expertise, credentials. They seemed like a solid bet, and one that I thought could help me realise my dream. I knew exactly what I wanted to achieve, and what I needed to do with the investment to make it happen. They were reassuring, positive and excited and, most importantly, I trusted them.”

But when it came to it getting on with it, the investors challenged how the investment was to be spent – too much on development, and not enough on getting it out to market they said. But our founder was developing something new, and something which needed high levels of technical skill to be able to deliver properly, in a way which give it its best chance in the market.

What happens next is the moment in our story where the direction changes. The investors suggested they adapt the product, change it, reconfigure it. Not so much that it didn’t feel like the original idea, but enough that as time went on our founder realised how far from their vision they’d been taken.

“What they wanted to me to deliver, while feeling similar, was actually entirely different from my original idea.” they tell me. “But the investors didn’t realise that, and even if they did they didn’t acknowledge the fact their idea still needed a lot of work to make it happen. They pushed and pushed to meet unrealistic launch deadlines, lacked understanding of the engineering process and demanded I create more units than the budget would allow. That eventually compromised the integrity of product, its quality and its capabilities. What we delivered, unsurprisingly, just didn’t meet anyone’s expectations.”

We’ve all had difficult periods where expectations don’t match up to reality. And in the keenness to deliver for an investor we’ve all made compromises, to ourselves and our idea. Saying no is hard when so much is on the line.

As the pressures of day-to-day managing a business, attending board meetings, reporting, and of course delivering the product, mount, budget management got out of control, tensions rose, and the relationship broke down.

In an attempt to course-correct, our founder tried to pull things back to the beginning point. They say: “I wanted to start over, go back to the original idea and try again. But the investors felt it meant we were going backwards, not forwards. I was convinced if we started over from the original prototype, not their idea, we had a better chance of success. But, things had just gone too far.”

So where does this leave us? Unfortunately, our founder quickly realised things had come to the end of the road. The investors froze the bank account, (outlandish) letters of no confidence were sent to shareholders and bad behaviour from the investors led to the team falling apart. A move was made to try and bring in a new CEO, removing rights to an opinion or voice in the direction of the business for our founder and strip back their involvement. Stress was mounting and health suffered.

Our founder took the brave decision to walk away, leaving everything they created behind, rather than compromise further. While they leave with little to no financial pay off, or real wages to speak off, now they’re free to start again.

Looking ahead

When I speak to our founder, there’s still a sense of optimism, of hope for the future. I know they’ll go on to do great things, taking with them the lessons they’ve learned.

So, I wondered, what are those takeaways?

1. Stay true to your vision – Never allow strong-willed investors to take you away from your proposition – you’re the founder, you know where you need to go. I’m not saying be rigid, but be true to the business proposal and model.

2. Investor diligence – they do enough of it to you. Do it to them. Find out what motivates them, try and get an accurate perspective of their intentions and ambitions. Don’t just buy the sizzle.

3. Make sure you have the legals in place – this is the most important thing. It’s invaluable to protect you from nonsense. Get them in good order. Our founder comments: I didn’t, and it came back to haunt me.

4. Build a good team around you – no one knows everything, and that’s ok. You need a good team around you with the skills to move you forward. Everyone needs a vested interest, but it’s important they earn their shares.

5. Listen to your gut – acknowledge the warning signs, don’t push problems under the carpet. Also, always think worst case – optimism is great but if you don’t plan for the worst you’ll always be firefighting, and you won’t know how to react to scenarios as they happen. Look at people like they’re going to do you wrong until proven otherwise.

6. Retain control of your board – in this instance the founder appointed two investors as statutory directors which gave them significant leverage. Think carefully before giving arms-length investors a board seat and certainly don’t give multiple board seats to associated investors.

Wise words from someone who has been through the wash of the world of start-up investment. And words I hope will help others avoid the same mistakes in the future.