“I was fired from my own company!”
These words from Steve Jobs, the co-founder of Apple, are a stark reminder of the balancing act that founders must navigate when they raise capital. Jobs was famously ousted in 1985 following a power struggle with the board of directors, but he’s not the only one to have been through this. In fact, his story is all too familiar for many entrepreneurs who find themselves in a similar position.
Raising capital is a critical step in the growth of any business, but it’s just the beginning of the journey. Founders face a new set of challenges as they strive to strike a delicate balance when bringing in investors.
Previously, I’ve covered five common mistakes founders make when bringing in investors. But in reality, there are several more that I see all the time, so I decided to touch on those in this new article.
By avoiding these 6 pitfalls, founders can navigate the challenges of securing funding and growing their companies into successful enterprises.
1. Giving up too much control for capital
In 2006, Jerry Yang, the co-founder of Yahoo, made the mistake of giving up too much control to outside executives, which eventually led to the board ousting him as CEO in 2009. He remained a board member until 2012, when he resigned.
But Yang is not alone. Many founders make the mistake of giving up too much control in exchange for capital, and it’s easy to see why this happens. Founders want to secure the funding they need to achieve their goal, but investors still want to have a say in how their money is being used. Ceding too much control can limit the founder’s ability to make important decisions and can harm the company’s long-term prospects.
Yang’s unfortunate mistake is a cautionary tale for many other entrepreneurs. It demonstrates how easily founders can lose their company if they cede too much control too early. Don’t get so excited over potential funding that you forget your initial goal: building your company.
2. Keeping too much control from investors
On the other hand, some founders may try to keep too much control from their investors. While it’s important to maintain a vision for your company, it’s equally important to listen to the people who are funding your growth. Investors bring a wealth of experience and connections to the table, and their insights can help you grow your company in ways you may not have thought of on your own. Remember, once you take someone’s money, you owe them a fiduciary duty –– some founders either never learn this or they forget it.
For example, in 2018, Elon Musk faced a lawsuit from his investors for keeping too much control over Tesla, despite the company’s struggles. Musk’s refusal to listen to his investors, and the resulting lawsuit, is another good warning to entrepreneurs who may be tempted to keep too much control for themselves. Striking a balance between maintaining control and accommodating the demands of investors is crucial.
It’s important to remember that investors are the ones who can make or break your company’s growth, you ignore their advice at your peril. Balancing the demands of both parties can be difficult, but it is essential to create a healthy working relationship with investors that can lead to success.
3. Focusing too much on short-term goals
Raising capital can be a long and tedious process. It’s easy to become overly focused on short-term goals, like pitching and hitting revenue targets. However, this can come at the expense of longer-term growth.
Once you reach your fundraising goal, you need to adhere to your long-term strategy and be sure your new customers align with your goals and objectives. Don’t get trapped in the idea that “any customer is better than no customer.” While these customers may generate some revenue, they could end up being a negative drain in terms of service. Focus on customers that fit the company’s values and who will stick around to purchase more products or services.
Toys “R” Us is all too familiar with this. The company that was once among the biggest toy retailers in the world, with more than 1,500 stores worldwide, ended up filing for bankruptcy in 2018. The reason? They struggled to compete with online retailers like Amazon and bigger stores like Walmart that offered a wider range of products at lower prices. Instead of investing in e-commerce and innovation, Toys “R” Us focused on short-term financial gains, including taking on debt to finance a leveraged buyout. This left the company vulnerable and ultimately led to its demise.
Don’t get sidetracked. Investors want to see that you have a plan for sustainable growth and profitability. Demonstrate that you’re doing the work for the company now and in the future –– potential investors will be more motivated to stick around for the long haul if they know the company is headed somewhere promising.
4. Not forming a board of directors
In 2014, Uber’s CEO Travis Kalanick faced criticism for butting heads with his board of directors (not to mention the workplace scandals), which led to a toxic culture and ultimately his resignation. As I touched on in the previous article, we have a similar example with Sam Bankman-Fried of FTX, who refused to form a board, assuming he and his team knew it all. The company’s downfall quickly followed, as it filed for bankruptcy in 2022 and incurred billions of dollars in debt.
One of the benefits of securing funding is that you can bring in a board of directors to help guide your company’s evolution. Some founders may neglect this step, either because they want to maintain too much control, or because they don’t want to deal with the bureaucracy of forming a board. This comes at a great expense, as a board of directors generally provide valuable guidance that can help you avoid making costly mistakes.
Nextdoor, a social network for neighborhoods, is a great example of the importance of having a diverse and experienced board of directors. Their board consists of people with expertise in different areas such as media (Leslie Kilgore of Netflix), data (Chris Varelas of Riverwood Capital), and finance (Mark Meeker of BOND). By having a diverse set of perspectives, Nextdoor has been able to make informed decisions and identify new opportunities for growth. Today, the company’s success is evident, with over 10 million registered users in the U.S. alone.
Even moreso, a board of directors can act as a mediator between the founder and investors, helping maintain balance and avoid any potential disputes.
5. Neglecting the team during the fundraise
As a founder, your team is your most valuable asset. It’s important to keep your team engaged and motivated in general, but this is particularly true as you deal with the challenges of securing capital –– ignoring the team can lead to high turnover rates and a lack of productivity.
For instance, in 2017, the co-founder of Evernote, Phil Libin, faced criticism for neglecting his team during the company’s fundraising and growth process. This led to a decline in morale and productivity –– a death sentence for a growing company.
Showing the team the big picture and keeping them on-board during the fundraising process is critical. Involve the team in the process and communicate how each person or department fits into the company’s vision and goals. By doing so, the team will feel valued and involved in the company’s growth. Richard Branson of Virgin stated that customers come second, but employees come first. You can’t succeed if your employees aren’t on board.
6. Ineffective communication
Enron is a great example of the dangers of ineffective communication. Once the world’s largest energy trading company, its downfall began in the early 2000’s until it ceased operations in 2007. We all typically think of Enron as being one of the biggest cases of fraud ever perpetrated in the US, but according to an analysis by Matthew W. Seeger and Robert R. Ulmer, the root of their downfall was actually a breakdown of communication. The company’s culture of secrecy and lack of transparency made communication difficult for employees, and allowed senior management to conceal the reality of the company’s finances. Enron’s executives failed to listen to their employees and failed to effectively communicate with their investors and other stakeholders, leading to unethical practices, accounting fraud, and ultimately to the company’s demise.
Effective communication is essential in any business, and it’s especially important during the fundraising process. Besides, consistent and honest investor communication has clear advantages. These include holding yourself accountable, maintaining a positive relationship with investors, receiving valuable feedback, gaining insight into the market and industry, and potentially receiving additional funding.
Lastly, be sure to set clear expectations with investors about the financials, how the company will be run, and what their role will be. Failure to do so can lead to disagreements and conflicts down the line, or to straight out disasters. You must also communicate effectively with your teams to ensure that everyone is on the same page and working towards a collective goal.
Raising capital is a critical step in the growth of any business and can be a determining factor for founders. The story of Jobs being fired from his own company demonstrates the importance of striking a balance between maintaining the vision and listening to investors and board members. Jobs’ eventual return to Apple in 1997 is often cited as one of the greatest turnarounds in business history, as he turned the company into a world leader. But don’t count on history repeating itself in your case, as you’ll be much better off balancing things out from the beginning.
Remember that you are not alone in this journey, and the more you engage and communicate with your investors and your team, the more likely you are to achieve your goals. By striking a balance between control and collaboration, founders can ensure a strong foundation for their company’s growth and prosperity.