Capital as Punishment

Capital

I must start by clarifying that this article has nothing to do with the subject ofcapital punishment.

Thanks to many years of work with entrepreneurs and PE / VC firms, I have come to witness the emotional pain that a fair number of entrepreneurs go through after they have raised capital and have given up control. Seeing their pain and unhappiness from close quarters has led me to coin the phrase, capital as punishment.

Entrepreneurs recognize that raising capital is necessary for growth. While most of them intellectually appreciate what it means to give up control to raise capital, very few are fully prepared for its emotional implications. So, while capital is supposed to be nourishment, it becomes punishment at least in their minds. This seems especially true for entrepreneurs who have been in business for a while, are older and have developed a certain attachment to their business and their ways of doing things.

There are at least four reasons for this sad development.

  1. Accepting accountability: A good number of entrepreneurs who haven’t worked for others or in corporate settings do not understand what it means to be held accountable by someone else. As long as they are privately held they don’t see themselves accountable to others in terms of their business plans, their performance, their strategies or their style. The moment they raise capital and come face-to-face with Investors who begin to ask many difficult questions, they begin to feel miserable. While some might protest that the Investors do not trust them, others will call them unreasonable or out of touch with reality. Only the enlightened entrepreneurs see it as their job to hold them accountable.
  2.  Demonstrating interdependence: Entrepreneurs are generally used to acting in an independent and autonomous manner with little need to consult and include others in shaping strategies or making decisions. Having raised capital, many struggle to respect and honour the inclusion needs of their investors. They may find it difficult to adapt themselves to develop a more inter-dependent relationship. As a result, when investors want to know why they are choosing to do something or how they arrived at a certain decision they might see it as questioning their autonomy.
  3. Accepting feedback: Most executives grow up in an environment where giving and receiving feedback is a non-negotiable reality. Unfortunately, many entrepreneurs miss this critical developmental experience. As a result, when investors give them feedback, they struggle to accept it with grace.  Many hate being told that they are wrong or that they need to do things differently.
  4.  Investor style: In addition to these entrepreneurial blind spots, the style of the investors can also add fuel to fire. If the investors are not emotional intelligent, not trained to have difficult conversations and do not have the time for all this (which can sometimes be the case, given the numbers of board some of the investors sit on) transacting all this can become quite awkward.

As a result of these and other factors, many entrepreneurs end up feeling quite miserable on a day-to-day basis even though the financial upside keeps them going, albeit with a certain level of disengagement. The good news is that the situation can easily be avoided provided there is sensitivity and preparation on both sides.

Two critical preparatory steps come to my mind:

  1. Relationship before task: It is important that at least one or two Partners or Board members enjoy a trust based relationship with the entrepreneur. Building this foundation of trust is critical before difficult conversations can happen. I have seen many entrepreneurs enthused or demotivated because of one good or bad conversation. A trust based relationship means that the entrepreneur feels respected, sees the investor as genuine and also sees him as having his best interest in mind.  This will of course call for time and a genuine intention. Without this foundation of trust, difficult conversations can become dysfunctional.  Partners of PE / VC firms may also benefit from being formally trained in the art of great conversations.
  2.  Support in transition: Entrepreneurs must recognize that the process of raising capital and giving up control is a huge and often life altering transition from a psychological stand point and managing it well is not as simple as turning a switch on. Seeking the support of a mentor or coach to manage this transition might be a great idea – even a necessity. With help, they will be able to learn some of the new skills that they may need in managing multiple stakeholders, being more inclusive, being more open to feedback, accept accountability and so on.

When PE/VC firms, its Partners and entrepreneurs act with maturity and preparation, the marriage is likely to be a great success and there are many success stories indeed.  If that doesn’t happen it may appear to be as fateful as capital punishment.

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