Financial investors vs business owners: Every startup’s ‘offside’ relationship

My cry goes out not to add to the orchestra of outrage as referees seemingly miss foul play in our favourite sports, but to voice my support for another cause, the “Business Owner” and “Financial Investor” relationship, where too many “offside” decisions are not blown.

Any business owner, unless their family has one of those black American Express credit cards or they have, like Scrooge McDuck, managed to save their life earnings, would have had a relationship with a Financial Investor in some form. Call them Angel Investors, Venture Capitalists, Financial Institutions or my Silent Partner, I refer to them all.

Like any relationship there are always two or more people involved each of whom have different needs. The business owner and financial investor relationship is no different. The business owner has what he thinks is a good idea which will make him rich enough to retire at 45. He needs cash to make it happen and wants to give away as little as possible for it. The Financial Investor has surplus cash, wants to make a super return on this, as quickly as they can and with as little risk as possible.

Sounds simple doesn’t it? If this were a dating site, the match should read over 85%. Surely this is a relationship where both parties needs are satisfied?

Then why is it that in dealing with financial investors the rules of the game means the business owner is left to feel as guilty and needy as a student asking their Dad for pocket-money after blowing it all on a night out at the start of the holiday? Or, as the proverbial subject line of my article refers too… make the business owner feel like he is always up against it?

So here it is, my list of new “rules” that I feel should be introduced into all business owner and financial investor relationships that would not only help make this relationship a better one but more importantly would see more startup businesses succeed.

Lengthen the game
Most financial investors are in for a game, where they get in and try to make the highest returns as quickly as possible before getting out. Yes, this behaviour sounds great on the surface when you are buying your first yacht one year after opening your doors, but often, like rewarding directors with bonuses based on annual results; this only encourages decisions that focus on the short-term which can be to the detriment of the business in the long run.

I am reminded of Google’s — “Don’t be evil” motto, which was the basis of its original business plan, and advocates a corporate philosophy where it focuses on the long-term even if it means they forgo short-term gains. This type of thinking from day one resulted in a win for both partners as Google became a trusted global brand. I am guessing that this also allowed them to afford more than just one yacht today?

Increase the number of players
Who is going to do the work on the ground, grind out the hard yards by providing the people asset and skill to set the business up for success? Marketing and sales, business modelling, finance and cash flow are just a few of the considerations a business owner needs to work through to get his business off the ground and he would be foolish to think he can do it, or know it all.

Financial investors often claim to offer this skill. In most cases, however, they are only able to give strategic advice or connect a business owner to their network of partners. I liken this to me offering David Beckham advice on how to play soccer because I have studied the game and have a few mates who play. Yes, this is better than knowing nothing about soccer but definitely not as good as having actually played the game or being there day-to-day when the game happens.

So why not make this relationship where there are three people? And, better yet, why not share in the business based on the value you provide; 33% idea, 33% people and 33% funding? I hear business owners and financial investors squirm as I type. Having the people asset in the right areas of your business from day one will not only help ensure the startup and the relationship is a success but will reduce the risk for both parties.

Allow innovation in the game
We are in a time where the world and how it operates continuously changes. These developments not only pertain to the latest gadget and device which Steve and Bill bring out but also to the way businesses model themselves. Newspapers are now free, brands only pay for people who click to see them while shoppers are willing to pay for a piece of paper that gives them the right to a discount.

Where is the business model innovation in this game? Crowd funding is a buzz but surely this can’t be it? It seems that after years of practice, complex structured deals are the accepted norm and are here to stay. So why not innovate, surely there is more than just the standard equity stake with a preference dividend? And, how about developing a model that works differently for a startup versus a business looking for funding later on in life?

Some of the cleverest guys I know work for the Financial Investors who create these deals, so, I throw the challenge to you. Allow innovation and innovate. Oh, and when you do, keep it simple please, there is a reason that consumers like Apple products as they are easy to use and understand.

Allow a neutral referee
Let’s face it most business owners are often not highly skilled in financial areas. Their passion lies in their idea. The majority of financial investors are good businessman but are often not highly skilled in the business owner’s passion.

What the financial investor does have though, is the contacts, time and funds to call on outside experts in their due diligence. The business owner is left man alone to work through the complex terms offered by his new partner.

Why not introduce a neutral referee or independent body to whom the business owner can go to get advice about the offer on the table? Most bodies which exist govern and protect how the financial investor manages the funds given to them by outside parties so why not have a body which provides for protection of the business owner? They are investors too aren’t they?

Well, there you have it, my 4 rules, which when implemented, I am confident will see the business owner and financial investor relationship going from strength to strength, result in more startup businesses succeeding and see a better game for all.