Why it’s a bad idea to deceive your investors
Investors are optimists. They invest in concepts and ideas presented by eager, smart and passionate entrepreneurs. The implicit deal assumes the entrepreneur will work hard and invest their exclusive time and energy to make the company successful. This makes sense. They get the capital from investors and then do their best to make the company work and return a profit to their investors. What happens if they do something bad ?
Investors invest in people not ideas
Investors are not that dumb. They realize that if they are taking a big risk on a company they really are taking a big risk on the entrepreneur. When they invest they need to not only believe in the idea but also in the entrepreneur. In the end the difference between success and failure is mostly due to the person or team running the company. They know that if the first idea is not working, the team will pivot and find something else. This is important because most ideas fail. Look at Slack, Twitter and Pinterest. The Slack team was working on a game and realized that the team chat tool was popular and decided to scrap the game and build one of the most successful business tools out there. They did the right thing: they pivoted the company and brought the same investor group along with them. Give them three cheers. Same for Pinterest — and the list goes on.
My personal story on this
When I started my first business with my co-founder in 1983, we had Steve Wynn invest in our company. I remember it well, because we were still in college at the University of Michigan and all of our friends and our parents were shocked that a casino mogul would give $50,000 to two students. Our first idea was to create software for the Apple computer; called Jane, it became the precursor to what everybody knows today as the Macintosh or Windows. We transformed the 48K Apple into a modern machine with a mouse and graphic user-interface and provided a basic word processor, spreadsheet and database. Anyway, once the Mac came out we were toast. Our sales cratered and we were out of money. So, we pivoted and started making software for the newest machine from Commodore called the Amiga. Why am I telling you this ? Well, when we created the next company, we brought along our investors, including Steve Wynn, without any request for more capital. It turns out that this company worked better and turned into a company many people know: Activision. What would have happened if we did not bring Steve along ? The day we were able to bring him a check that returned his money and then some, he said the following: “I did not invest to make money, I invested in both of you, I wanted to help”. We did the right thing. We never looked back.
Morality is a good compass
Loss of money is part of the roadmap for early stage investors. But what if the startup has done something wrong to its investors ? What if the entrepreneur, unbeknown to its investor, starts a new company and devotes time and efforts to build the other company ? Does the entrepreneur commit a dereliction of duty to the original company ? Does the entrepreneur have a moral obligation to their investors because they took their money and are clearly not going to put in their best effort; worse, will they secretly abandon ship while building another one ? Sounds implausible ?
Here comes my Honey
StartEngine LLC, the accelerator company, invested 4 years ago in a new company called NightAway founded by Ryan Hudson. He is a bright engineer educated at MIT and pitched us a cool concept to help couples find interesting ideas for going out on dates. As investors, we invested in him and his co-founder, George Ruan. This decision was made because we figured that if NightAway is not going to work, they will pivot and find something that will work. In the end, a bad idea run by smart people is still viable because when you eliminate the idea, you have great people. We helped the team get started, provided mentorship and introduced them to our network of mentors. After a few months, they decided to pivot and we cheered and supported them. The new idea was to find a way to get data on the wait time from restaurants. They thought many websites would like to pay for that data. Consumers would like it. They named it WaitScout. Then something weird happened. One day, I went on LinkedIn and brought up Ryan because a potential investor wanted to see his bio and explore an investment in the company. To my surprise I saw he had started another company. This new company was called Honey. The strange thing about it is that it was the same founders and it was being built at the same time as NightAway.
Honey is not so sweet anymore
I confronted Ryan about this discovery. I told him we made an investment in him and his co-founder and he had an obligation to devote his time to his company and if he wanted to try something new then a pivot was the right way to proceed. I was furious. I felt we were being treated as if the investment we made, the time we devoted and the support we offered to help them succeed was not important. In fact, it was worse than that. He chose to mislead us and spurn his responsibilities as a founder and leader. He went rogue. I decided at the time that a written response was necessary and sent him a letter, asking that he do the right thing. He refused.
The takeaway
If you have a tried and true investor, better screw him first before he helps you. Funny isn’t it ? The takeaway I hope entrepreneurs learn is this: Do the right thing. Your reputation is more important than money. If you do not agree then do not take money. Go build alone.
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The views and opinions expressed in this article are those of author Howard Marks. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:https://www.startengine.com/assets/Disclaimer.pdf
