Hi,
This week I delve into how investors can kill a company. Crazy to imagine how people who are supposed to build you up can tear you down, but is it always a bad thing? Also;
📊 - How long it takes to build a startup to exit
🎙️ - Podcast #53 w/ Michael Markesbery- From Backpacking Nightmare to $50M DeepTech raise
🆓 - Free startup resource- get the Investor Update Playbook
Welcome to issue #85 and Happy reading!
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Fundraising Demystified Episode 53 Live Now!
In this episode, I sit down with Michael Markesbery, founder of OROS Labs who turned NASA tech into a DeepTech empire and raised $50M in capital in a journey that began with a jacket problem in the Swiss Alps! Check it out on your favorite platform:
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I've said it a million times, building a startup is a marathon, not a sprint. And resilience is key, but do you have 10 + years in you to wait for your idea to go from idea to exit?
The team at Carta looked at how long it takes most companies to get to closed IPO markets. And sure, there are some outliers, but you may have to wait a decade or more. Peter Walker, Head of Insights at Carta explains more in this post.
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How Investors Can Kill Your Company
A couple of weeks back, I saw this post and shared an opinion that may have sounded anti-founder (see my comment below). Sure, we can demonize the investors for not believing in the founders, but there's more than one side to every story.
In case you didn't read the post, here's the TL;DR: An AI manufacturing startup secures some capital, flounders, then pivots to EdTech and the investors ask for their money back- effectively killing the startup.
Hear me out, I know my take may be a little spicy, but imagine you've just signed the lease on your duplex, only to find out that the top floor already has other tenants. You're definitely pulling out, right? Similarly, the investors in this case are not just buying into an idea; they're buying into a specific vision.
The investors believed that AI manufacturing had the potential to disrupt an industry. But then, a few months in, the founders decided, “Nah, let’s do Edtech instead.” Big ask.
From an investor's perspective, that pivot can feel like a bait-and-switch. You're now part-owner of a business that looks nothing like what you signed up for. Edtech might be hot, but that’s not why you opened your wallet. And what about the terms of the investment? Are the founders glossing over any commitments or milestones they agreed to when the check was signed? If so, that’s more than just a pivot; it’s a breach of contract.
Investors also have to answer to their own LPs and stakeholders. If the pivot looks like a shot in the dark, and the odds of success seem even slimmer than the original plan, asking for the money back might be seen as a responsible move. Plus, if the investor's thesis is AI/hardware, then having an EdTech portfolio company doesn't make sense.
Now, I’m not saying founders should be held hostage to a failing idea. But here's the kicker—communication is key. You can bring investors into the pivot conversation early, showing how the new path aligns with the original vision or, at the very least, offers a stronger opportunity. Make the case, and make it good. Being transparent, sharing goals, and managing expectations can prevent lots of legal headaches and save what’s left of the team’s sanity at this point.
This may be putting some of you off pivoting (I spoke about this in issue 78) but I still feel some pivots are justifiable. From the investor's POV, I'd consider;
Investing in the team: At the seed stage, investors are betting on the team as much as the idea. Pivots are part of the startup journey, and a strong team should be trusted to navigate these changes effectively. If this team showed experience in the EdTech space, then they might still be the right match.
Flexibility is key: Startups are inherently uncertain. The ability to pivot in response to market feedback or new opportunities is crucial. If the pivot aligns with their thesis and isn't a breach of contract, investors should be flexible and supportive of strategic shifts, not rigidly attached to the initial concept.
Trust in execution: If a company finds traction in a new market, that’s a sign of potential. A pivot isn’t necessarily a failure; it can be a smart move that leads to greater success- and even bigger returns for the investors.
Risk of overreach: Investors threatening legal action can strain relationships, demoralize the team (as we saw by the exit of one co-founder in this case), and potentially doom the company. Early-stage investments come with inherent risk, and demanding money back could do more harm than good.
Communication Matters: Founders should keep investors informed and involved in decisions, but investors should also recognize that they aren’t running the company day-to-day. Collaboration, not confrontation, leads to better outcomes.
So, yes, sometimes investors might just be right to get cold feet. And sometimes, it’s up to you to ensure they don’t.
Free Fundraising Resources
This week, we've looked at how we can help make sending investor invites for you! Check this out!
✉️ - Playbook for Sending Investing Updates - Download it Here
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