VCs are VIPs in the entrepreneur's world, no doubt. They provide the money and, in some cases, a hefty dose of guidance and direction -- based on their knowledge, experience and skills. It would be unwise, not to mention a bit limiting, for an entrepreneur to ignore those VIP voices. There's a vexing problem built into the system, however, when a start-up's investors are its primary -- or only -- source of strategic guidance. To define the problem bluntly, there are too many biases at play in the investor/entrepreneur relationship to ensure that their advice will be, 1) objective; 2) based on valid assumptions; and 3) truly the wisest direction for the situation at hand.
LIke anything you try to paint with a broad brush, this won't always be true. Some VCs may excel at providing appropriate strategic advice with precision, despite their biases and limited view into the depth of the company. Even investors who are terrible at strategy might be right some of the time. But before I wrote this post, we checked with the VCs themselves, and they nodded their heads in agreement. "We like to think that we can help them solve strategy well, give them all the guidance they need, get them unstuck," one told me a couple of weeks ago, "but the truth is we're not able to be 100% objective, and I'm sure we never really know the full story of what's going on day to day."
The challenge comes down to three biases that are hard to remove:
- Bias 1 - The entrepreneur doesn't want to reveal the "naked negatives" in the business to the investors. As HubSpot co-founder Dharmesh Shah recently mused on his blog, among the top things entrepreneurs never confess to their investors is, "We had our management team meeting yesterday and we've determined that we're kind of screwed."
- Bias 2 - Investors want returns. Yes, well, duh. Investors' top priority is ensuring that their capital returns more capital. But, wait, doesn't the entrepreneur want the same thing -- for the business to take off and revenues to soar? Not necessarily. Not if it means abandoning a vision for where to sell or what to sell, in favor of a different path, before the entrepreneur is ready to abandon that vision.
- Bias 3 - Investors want to be right, so they rely on what they know. Another no brainer, this one! We all turn to experience and background. Which, as Clayton Christiansen points out, leads to the Innovator's Dilemma: what was right yesterday may not be right today.
How does an entrepreneur best deal with this challenge? Day after day as we work with start-ups seeking much-needed strategic advice, the answer is obvious. Listen to the investors. Embrace their advice with gratitude and an open mind. And don't stop there. Seek out advisors and consultants who can be truly objective and, perhaps because you're paying them to do so, are absolutely 100% in your corner of the ring. Take your challenges to strategy experts with whom you can share the worst of your disfunction and existential angst. Our start-up clients consistently name our lack of bias and ability to be creative and objective when asked why they chose to entrust strategic guidance to us.
I'd insert a plug for SeriesC's consulting day rates and our two-day intensive "surgical strategy sessions" here, but that would be kind of shameless, don't you think? Well, what can I say. I'm biased.
(Seriously, do get in touch if you think we might be able to help; the rates start out very reasonably to make our services accessible to start-ups without a lot of capital.)