Don’t Snatch Defeat from the Jaws of Victory – Part 3

Updated November 6, 2011

Doc Sheldon

This is Part 3 of my investor series. If you haven’t already, you should first read Part 1 and Part 2.


The integration of investors can bring on a number of changes for the company, the owners and the folks in the trenches. The availability of funding is a positive aspect, if properly utilized, but there are other considerations – each of which can be as positive (or negative) as the parties decide to make them.

DreamsFor the entrepreneur, it can be difficult to let go of a piece of his/her dream. I imagine it must be like sharing a child with someone from outside the family. In situations where funding is essential for the continued survival of the company, accepting this may be easier, but it’s still an issue for most. I’ve heard many founders say things like “This is MY baby!” when an investor is pressing for changes. Enter the green-eyed monster.

The other aspect of sharing the dream is the financial side. Having dedicated much time and effort to developing a concept and starting up a venture,  some may have difficulty surrendering a percentage of their company to others. A jealousy can set in, that if not overcome, can make it very difficult to build and sustain the cooperative spirit needed to take the company to the next level.

While the entrepreneur is coming to terms with sharing control and ownership, the employees of the company are fighting their own battles. Some of them may have been around from the start, and may find themselves in conflict with their loyalties. While they’ll probably realize that new funding can save the company (and their jobs) or open new opportunities, they may also feel as though embracing new directions and goals means they are betraying the founder that got them this far.

Those feelings will be best mitigated by the entrepreneur’s attitude and actions. There is always uncertainty when new major players come onto the field. Will they purge the “old blood” and bring in their own people? Will staff be reduced? Dozens of doubts surface in the employees’ minds, and rumors will build a cloud over the water cooler. Some may even decide to look for other employment, rather than face the possibility of being a potential victim.

LeadershipIt’s up to the entrepreneur to address those questions and doubts immediately – before they’re even evident – and tell the team what to expect. They’ve always looked to the entrepreneur for leadership, and now, they’ll be desperate to see some. Each company’s situation will be different, but these side-effects of taking on an investor are essentially universal. Failure to restore a sense of security can bring catastrophic results, and in extreme cases, could destine the venture to failure. Now is not time to lose a big portion of the company’s experience and knowledge.

Most entrepreneurs won’t be surprised to see growing anxiety in the company, and will take steps to calm the fears of their people. However, many won’t realize the extent of those fears. Their employees may trust them with their lives and their families’ well-being, but now the fear can even extend to concern for the founder’s ability to protect them. They know their boss is no longer exercising exclusive control, and has new dragons to slay. Underestimating their uneasiness can be a grave error.

Experienced investors, on the other hand, won’t be the least bit surprised to see an undercurrent of uneasiness – they’ll have witnessed it as many times as they’ve invested in other companies. They may be able to counsel the entrepreneur, but it’s unlikely they’ll have sufficient credibility with the staff to put their fears to rest, at least early on. In a sense, they may be seen as the enemy by some, and any comment made, however innocuous, will be suspiciously dissected in the employee break-room.

These are all things to be given serious consideration when investors enter the picture. Companies exist on paper and their products exist on some shelf. But the real life of the company is in its people. They are the source of its energy, goodwill, reputation and progress… as such, they are its most valuable resource.


Here’s what our interviewees have to say on the topic:

Is it difficult, on a personal level, to surrender a piece of your company to someone that may contribute little or nothing to the company on a day-to-day basis, other than money?

Steve, entrepreneur

“20 years ago I would have said yes to this question. We had an opportunity to bring in an investor to a computer training center we were building in northern California. The deal eventually fell through because we could not come to terns between the amount of money we would receive and the amount of ownership we would have to give up. We placed far more value on our staff and process than we did on the dollars being offered. In the long run I think that one moment was what eventually led to the company failing. We simply ran out of money before we hit critical mass and were able to endure setbacks.

“Since then I have come to understand the value of having a bucket of money in the closet. Much like there are generally no customers without a sales team, it is difficult to grow a business without cash. Where that cash comes from, and what needs to be done to keep it, are just details.

“Add to this, your investor becomes a partner. They will hold a seat, or more, on your board of directors, they will be part of the decision making process when it comes to hiring key personnel, expanding or changing product directions, or accepting further investors. While VCs tend to be viewed as just piles of money that vote, they can be a huge part of your business and a huge part of actually making you successful as a business.”

Rand, entrepreneur

“Yep. It is. And it’s constantly unnerving to think about it during the funding process when you realize that since the investor places 10-100 bets like yours and diversifies across the board, they’re really not nearly taking the risk that the entrepreneur is, yet they receive the same (or often greater) rewards, with a tiny fraction of the work. That said, we couldn’t have done what we’ve done at Moz without Ignition backing us. Those $1mil and the creation of more formal entities and structures around the company have helped take us to 8 figures of revenue, a team of 50, 14K customers and all the rest. I certainly wouldn’t go back and change anything.

If counseling a business owner that was considering taking on a round of VC funding, what are the three most important things you would want to impart to them?

Steve, entrepreneur

“I only have two real suggestions. First, be true to your vision and your employees. The product may evolve or change every three minutes, but if your vision and dedication to those that are supporting you stays rooted, then the influx of instant money from an investor will not change you into a Lamborghini-buying, fake businessman that was changed by money.

“Funding is not the goal, it is a step along the way toward success and in the end is simply another tool that can be used to achieving your dream.

“Second, maintain enough control of your business so that you can not be forced out before you want to leave. There are plenty of stories of business founders being set aside shortly after they accept financing and you do not want to be one of those stories.”

Rand, entrepreneur

“#1 – Do massive amounts of research. Read everything you can find on the web (there’s a ton). Talk to everyone in your network who’s tried to raise money or has. Don’t ask them for help – ask them if you should. Show them your product/vision/accomplishments and get advice. Much of it will conflict, but the process is hugely valuable.

“#2 – Don’t try to raise VC until you’ve got some damn impressive numbers to show – traction, adoption and recidivism from customers/users are essential. That is, unless you’ve sold a company in the past for millions and have investors begging you to start something else, in which case, it’s a different ballgame.

“#3 – Rule out everything else first. If friends and family money + credit cards + banks can get you to breakeven or profitable, do that. If you can start with a different model and show traction and revenue, do that. Do whatever you can to get to ramen profitable so you don’t need outside investment. Then start asking for advice, input and “whether you should raise,” don’t go directly for the “I want money” path.”

For you, what is the most difficult change brought about by seeking and acquiring outside investors?

Steve, entrepreneur

“We are still very early stage in the development of our business, but each meeting with a potential investor has helped us better refine our business model and our path to make us more likely to find the investor that is the best fit for us. The biggest advantage this has given me after several meetings is that I am better prepared to explain the business, why it will be successful and how we plan to exit at some point”

Rand, entrepreneur

“Mentally and emotionally, I feel far more invested and committed to SEOmoz, which is generally a good thing, but it also means all my eggs – from every part of my life – are in this one basket. The ups and downs of the business feel much more “life and death” than they ever did before, and while we’ve been generally successful, that rollercoaster takes its toll.”


And a couple of questions for our contributing investor:


If counseling a novice angel investor considering his first investment opportunity, what are the three most important things you would want to impart to them?

Nova Spivack, angel investor:

“I would counsel against the current fad of “pay and pray.” Don’t invest in 100 deals hoping to play the odds and get a few successes. It doesn’t work that way. The odds are stacked way against you and this is not a winning strategy. Instead, invest intelligently only in those few ventures that go after markets you truly understand first-hand. Invest in what you know.

“If you angel invest, you are going to have to be available to the CEO and be able to pull out your contacts and work hard to help the company get more funding, more customers, more buzz. If you don’t have time to do that, or you can’t add value in this way, you really are not leveraging your money and are not really playing the game as well as it can be played. It is really not helpful to startups to have investors they can’t reach or who don’t add value. I see this a lot.

“Never invest money you can’t afford to lose. Statistically, venture investing is a very tough business – which is why venture capital as an asset class has generated negative returns for most investors. Angel investing is even tougher than venture investing because angel investors take on more risk and are often squashed by VCs when they later invest. So unless you can really pick winners and add a lot of value, it’s a very risky endeavor. Only invest money you can afford to lose.”


Do tech ventures have to be located in Silicon Valley to succeed?

Nova Spivack, angel investor:

“No. The technical teams can be located elsewhere, and it may even be an advantage (from a hiring and cost perspective) to have them somewhere else. But the venture must have a strong presence and network in Silicon Valley to be taken seriously by VC’s in the Valley. Ideally the CEO and business team should be located in San Francisco or Silicon Valley if you want to be funded by a Silicon Valley venture firm — A rule of thumb is that VCs like to invest in CEOs and teams that are within driving distance of their office. But note that Silicon Valley isn’t the only tech startup ecosystem – there are many others, although they are much smaller. Also note that several Silicon Valley VCs now have branch offices in other locations. However, the center of the industry is still Silicon Valley.”


I hope this series has been helpful and interesting. While I doubt that it’s going to offer much of value to an established investor, hopefully it will give anyone that may be considering seeking investors for the first time some idea of what they’ll be facing.

MarriageThe “marriage” of entrepreneur and investor, much like a conventional matrimony, can be challenging and fraught with hazards, but it can also be tremendously rewarding. The key is in being properly informed and prepared, while focusing on the business aspect, not the emotional.


I’ll leave you with one parting shot, offered by Rand Fishkin:

“You need a network and connections into CEOs, successful entrepreneurs, angel investors and VCs. Without access to that inner circle, it’s almost impossible to get funding. Those people will want dozens of touches, dozens of people in their networks who know you and have worked with you or heard good things about you. Building all of that takes time and energy – if you ever think you might want to raise money, start building those networks now.”


  1. I’ve waited until the last post was up to comment and to say thank you for inviting me to participate. I was a bit intimidated to be included in this series with Rand and Nova, but really appreciate the opportunity to contribute.

    @rand, I appreciated seeing your comments knowing some of what you have been through with your own fundraising.. I may come knocking on your door next year for more advice from someone that has had a successful funding..

  2. whoops – ==bad combo.

    @Nova, thank you as well. I enjoyed seeing your comments as an investor and they have given me even more to think about as we go forward..

  3. Jim Calaman says:

    I’m never met an owner who is happy about giving up partial control of the company. It is sort of like putting your kid up for adoption. You don’t want to do it but it is necessary to survive. A written plans needs to be formulated so that investors and owner are on the same page.

  4. Actually, Steve, it’s me that owes you guys the thanks. 😉