Updated: Jan 7, 2020
GUEST WRITER for Entrepeneur.com
Founder and CEO of Hint
I’ve raised a few rounds of funding as an entrepreneur and CEO, and frequently I hear from upstart entrepreneurs who want to know how I maintain a good relationship with my investors. After all, it can be a volatile relationship. Many investors have never been entrepreneurs themselves, so they don’t always understand what you’re going through. But, at the same time, they’ve put their wallet on the line for you. How can you make sure everyone is happy?
What I tell entrepreneurs who ask me is: Be truthful. Don’t lie. That's the key to a healthy, productive relationship. This might sound like common sense, but little white lies run rampant in entrepreneur-investor relations, and it’s got to stop. We’ve heard over and over about scandals at companies like Theranos, where investors were left in the dark about whether the product they were backing even worked. Or, on a smaller scale, when was the last time you heard an entrepreneur assure an audience -- maybe even in the press -- that they were “crushing it,” only to learn that that their company was actually about to go under? Sometimes, it’s a near-miss. Yogurt brand Stonyfield Farm’s founder has admitted that he lied to investors about a bank loan in order to secure more funding.
Very few of us intend to lie, but we’ve all gotten used to creeping levels of dishonesty, especially as we broadcast our lives online. A survey from CareerBuilder.com found that 56 percent of employers have found evidence of applicants lying on resumes, which is low when you compare it to the 90 percent of people who lie on dating apps. Even if we aren’t in the dating market, chances are we regularly lie on social media, too. On many levels, this is understandable; we want the people around us to see us positively, in part because that makes us feel good, too.
But this gets particularly problematic for entrepreneur-investor relationships. Unless you’re a public company, you don’t technically have to disclose a whole lot, and many founders want to tell investors what they think they want to hear. However, if you want to keep them in your court, honesty should be your top priority. Given that companies routinely raise multiple rounds of funding before a successful exit, you’re likely to be asking the same investors for additional capital. Research has found that inauthenticity comes across in interpersonal communication, even subconsciously, and it can erode the closeness of the connection between the two parties.
When the urge to fib or mislead arises (and it will), instead consider these four strategies to help keep a clear conscious and practice good business.
1. Keep your expectations realistic.
When you’re at the helm of a growing company, especially one that’s in an innovative field, there’s a temptation to let your imagination run wild when it comes to the possibilities. I mean, sure, your company could be a billion-dollar “unicorn” some day, but the reality is, 75 percent of venture-backed startups fail. Your investors know this. That’s why your well-meaning attempts to assure them that they’ve backed the next big thing may make you come across as out of touch with reality at best, or disingenuous at worst.
2. Get ahead of the problem.
Maybe you had a hiccup with a prototype or your company didn’t meet sales goals. It’s common to want to bury your head in the sand and hope that the whole thing blows over without your investors ever finding out, but let’s be real -- that’s never the case. When you run into an issue, notify your investors immediately and lay out your plans to resolve it. If your investor hears about the problem through someone else, then you risk them getting an inaccurate or incomplete picture, and they’ll wonder why you didn’t give them a heads-up.
Whenever there’s something I think may unexpectedly pop up in the press or in my dealings with investors, I do everything that I can to give them as much advance notice as possible. Even if it’s something that is only peripherally relevant (e.g. “Hey, one of our competitors is about to be acquired by a huge soda company”) this shows that you’re vigilant about keeping investors up-to-date, and it emphasizes that you care about more than just taking their money.
3. Share your solutions.
I’ve had to tell my investors some pretty bad news in the past. My independent CPG brand, hint, was hit hard by the recession of 2007. Not long after that, we lost our biggest deal with a retail distributor. On both occasions, I had to approach my investors and be blunt. I told them that the recession isn’t going to be great for any of us and there’s a lot coming that we couldn’t have expected. Then, I revealed my strategy on how to move forward. My investors had appreciated knowing that we had thought through these situations and were keeping our heads as cool as possible.
4. Ask for help.
Some investors just want you to turn their money into more money. But many investors, even if they don’t have seats on your board, want to take a more active role in being mentors and advisors. This is typically a strategy they apply to their entire portfolio. Even if they’re more passive, don’t be afraid to ask for their insight when something goes wrong. A Stanford study showed that two-thirds of CEOs wish they had more counsel than they’re currently getting. Soliciting their perspective also demonstrates that you respect them and what they can offer you, and can also give them an extra dose of reassurance that you aren’t just trying to “do it alone” when it comes to your company. In your toughest moments, showing both honesty and vulnerability will say a lot.