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Startups

How to protect yourself from crooked founders

Source | LinkedIn : By Dr Aniruddha Malpani

Most people in the startup ecosystem feel that it is the funders who have all the clout – after all, they’re the ones who have the money. There are far more entrepreneurs who are chasing money as compared to the number of deep-pocketed investors looking for startups to fund, which means that the balance of power is in the hands of the investors, who can pick and choose whom to give their money to. It is often perceived that they’re the big bullies in the room, because they’re the gorillas, and who can make entrepreneurs dance to their tune.

However, the reality is quite different after the cheque has been signed. Once the money has been transferred to the founders, things change dramatically . Since it’s the entrepreneur who is running the company, the investors have very little control. The only information they have about how the company is performing is what the entrepreneur chooses to share.

The trouble is that when things are going badly, entrepreneurs will not share information; or will repackage it in such a way that they don’t tell you what’s actually happening. Sometimes this is because they’re ashamed of the fact that they’re not being able to deliver. They will gloss over the inconvenient truths, which means you often have absolutely no idea about what’s actually going on in the company.

This is what makes startup investing such a risky business. No matter how much you talk about the role of governance , and the importance of openness and transparency in sharing information, it’s pretty much up to the entrepreneur to choose to do this – or not to. We now have three founders who have taken us for a ride, but you only realize this after the event, when the company is on the verge of having to shut down, and this can be a painful lesson.

Once you realise that the founders have been hiding information from you , you lose trust in them, and the company is then headed in a downwards spiral. It’s very hard to repair the trust deficit, and things usually become progressively worse, because founders and funders start blaming each other and begin talking at cross-purposes.

Just because I’ve burned my fingers doesn’t mean I am going to stop investing in startups. Yes, I’ve been cheated by founders, but this doesn’t mean that all founders are crooks. Just like I’ve had bad experiences with these entrepreneurs, I’ve had some extremely good experiences as well .

For me, the important lesson is to learn from these mistakes, and try to incorporate safe- guards, checks and balances, so that the chances of this happening will go down in the future. Now, I understand that not all of this is in my control, and that quite frankly, if a founder does want to take me for a ride, it’s always going to be possible for a crooked entrepreneur to do so.

 

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