There are many reasons why an investment in a start-up or high growth company will not be successful.
Aside from the usual commercial challenges, it has been my experience that many investors’ problems are completely avoidable.
In guiding teams there are some fundamental truths that seem to be proven over and over again. The following are relevant to investors and to business owners.
3 Critical Agreements
Owners must agree on 3 fundamental principles if they are to have long-term success in business together.
If they aren’t in alignment on these then it is only a question of time before the whole business is restructured (a.k.a. collapses).
Lack of alignment in one of these 3 areas typically shows up as arguments or ‘passive aggressive’ behaviour between the owners.
Two further principles are of great importance to investors.
These 3 will determine whether your investment ends in poverty or prosperity
Nick brings an understanding of these critical areas for establishing a stable business
3 Critical Principles for Owners to Agree
Balance between Income, Equity & Control
There must be agreement on the balance between income, equity and control between the founders.
It is surprisingly common for founders to divide up the equity equally and do the same with the income from the company. When one of the founders feels they are shouldering more of the burden than others, ill-will corrodes the relationship. This frequently leads to the breakdown of the core team. However this need not be the case.
Proportion of surplus Spent or Saved
A conscious choice has been been made and agreed between the owners (and the investors) of how much of any surplus income is reinvested and how much is extracted as salary, bonuses, dividends or perks.
As future profits and equity value derive from reinvestment in the business, this aspect tends to become relevant once the business starts to be successful. If not properly handled it can lead to huge dissatisfaction.
Individuals have very different perspectives to risk. And risk shows up in a variety of ways. There needs to be acknowledgement of the risk profile of each owner and of each director.
Also there needs to be a risk profile for the company which is agreed by all the investors. It is likely to be different from the risk profile of any one individual. It is one of the greatest hidden disrupters of strategic proposals. Without it there will be a great deal of energy wasted on inappropriate strategies and it will have a profound impact on the energy in the boardroom.
Nick has also been witness to the destruction of at least one company due to risk profile mismanagement.
2 Additional Principles to Agree with Investors
Start-ups and High Growth Companies usually concentrate on revenue and profit, both now and in the future. From an investors’ point of view the main focus is on equity value. This brings into play not only profit but many other considerations that a Board of Directors should consider.
These other considerations affect the profit multiple that a business can attract when the business is valued. The result is to leverage the projected profit to many times the value on capital raising, equity swaps or sale.
Capability of the Organisation to Deliver
Start-ups and High Growth Companies are often fixated on product development, on market penetration and on operations. Quite right too. However what is often overlooked is what would happen if one of the key people should become unavailable (whether through illness or disenchantment).
Attracting talent, developing skills and transferability of these skills to others in the company is a vital activity once the initial proof of concept stage has been reached. That is a natural means of de-risking your investment while increase the value for sale.
Often founders need to feel they are indispensable. From an investors’ perspective that brings an unnecessary risk that can be avoided.
Contact Nick Winton
If anything on this page raises concerns for you then call Nick. His Board Development programme will guide founders, owners and other key stakeholders through these challenges.
His ‘Coffee Cup Review for Shareholders‘ forms the basis for individual conversations with the owners to clarify these 5 key aspects of forming a successful enterprise.
Nick Winton, 07776 238 967