How Startups Should Treat Investors Money

If you run a startup, or you have founded a startup, you will know that many startups rely on investors money. Not all startups, to be clear, but many of them do rely on investors money. Startups need investors money to sustain their operations, to hire people, to run marketing operations, and to expand.

For investors, there is an attraction in investing in a startup.

The first class of investor is private individuals. These people have money and they are willing to invest in companies as a way of providing seed capital. Usually they will enter at very early stage.

The second class of Investor is fund managers, private equity companies, venture capitalists. These people manage funds on behalf of individuals and companies. In their line of work, they identify companies with high growth potential. By investing into the stock of these companies, they can grow their clients capital.

The third class of Investor is institutions. Institutions limit their risk exposure by investing into new business models, which are unregulated, or exploring new sources of income. Incumbent players cannot participate in the market in certain ways if the markets are regulated.

All of these classes of investors want to see their investment grow. Essentially, they hope that the money to put into startups will be able to yield a high return.

However, it is clear that many startups fail. Why do they fail? Everyone has a different story. Take for example, a photography startup established by my brother. He started a photography equipment distributor. He identified good brands, and a need of the customer in the market that was not met. My parents invested their savings into his startup. For a while, he did quite well. Unfortunately, his clients approached his brands directly, and ultimately took away the most profitable brands from him.

The startup ultimately failed. But it was a good experience for us to see how startups struggle with market forces, and competitors. During that time, he gave us regular updates about his company, and what was happening with his clients, and his suppliers. We understood exactly what he was going through. There was little that we could do, other than to support him financially and give him encouragement. But he did seek our advice, on what he should do. I would like to believe that our advice made a difference to how things worked out.

You see, too many times, a new start up bursts on the scene, using its investors money to carry out branding and marketing exercises. They also believe in the mantra of growth. This sometimes leads them to do things that are not justified, such as going on a hiring spree without properly examining whether there is a need for this #hiring exercise. This leads to a burning up of your investors money.

I believe that startups can do better, and treat their investors money better.

If you run a startup, you have an obligation to keep your investor informed of the developments in your company. You also need to inform them of how you are using their money. Better yet, if you do not mind, you can seek their advice as to how your investors money should be used. And if you can find them of your difficulties, you may find to your surprise that they will be able to help you and open doors for you.

There is also something known as a clawback clause. Some investors limit their risk exposure by inserting a clause into the investment agreement that stipulates, that they have a right to demand the return of their investment capital. If you see such a class, you should take all steps to keep your investors informed of what you do, and how you are spending their money. In this way, you would be discharging your duty as an investment.

It would not do well for you, if you were to go silent for one year, and then you show up with a report that says your company is going belly up. That would make your investors upset. They will ask themselves how you have spent all their money. They will wonder whether you have tried to be the next wolf of Wall Street. And then the accusations will come.

A startup that sits on its investors money must remember the parable of the talents. For those of you who haven't heard of it, it's a story in the #Bible. A master his three servants in charge of his wealth. He also gave them some money to be kept safe while he was away. When he returned, he asked his three servants what they had done with his wealth. The first servant had multipled his masters wealth by many times. The master was happy and gave him even more things to be taken care of. The second servant and also multiplied his master's wealth, although not as much as the first servant. Nevertheless the master was also happy and promised him to also put him in charge of greater things. The third servant told his master that he knew how his master was a hard man. He gave his master the original amount that the master had given to him. He said that he was afraid of what the master would do if he lost that money. So he said that he had buried the money in the ground. The master was upset, and scolded the third servant. He said that the third servant should have at least put the money into a bank so that it could earn interest.

The conclusion of this piece is that, startups should do what they can to #grow their investors money. They also need to be responsible in how they use the money. Nobody puts money into a startup with the intention of losing it. When you have money, you want your money to earn more money for you. Money makes #money, but only if it is in the right hands. And #startups need to take care to grow the money, and remedy the situation before they lose all of it.