Bad News is Good News, No News is Bad News

Mike Collett
Sep 15 · 4 min read

How can you tell if a founding team will be honest with investors?

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Every day someone is trying to sell us. It’s our job at Promus Ventures to cut through the chatter and figure out if the team in front of us is all that and a bag of chips or just another team with hope as its strategy.

Why is fundraising so hard? Easy — because many founders seem to only wax poetic about how they will change the world with superfluous vernacular and heady banter. Little do they know people aren’t always swayed with flowing rhetoric and giant TAMs…

What separates the best teams is their grounding in reality and ability to show the risks and gaps in their thesis. Why would any team ruin their pitch where every minute counts highlighting the flaws and unknowns of their company? Because those teams are honest and open with what they are building and don’t need to fall back on a selling strategy to woo investors over the line.

How can you tell if a founding team isn’t giving its investors or board the full story? Here are some troubling signs:

  1. The team is in love with themselves. Regardless of how over- or undersubscribed your recent round was, teams must keep a level head through the journey. We’ve invested in followons for portfolio teams seemingly doing everything right at high valuations only to lose it all 12–24 months later. We have a “zero tolerance for egos” standard when working with founders/vcs. Cockiness only adds fuel to the fire and when you get ahead of yourself at the early stage, it can get ugly.
  2. Important things about the company’s business are learned from outside the managment team. Great management teams don’t silo their companies or manage in ways that don’t unite everyone. When we hear problematic things from the market or junior employees that we have never heard from management, red flags can emerge. Founding teams are fooling themselves when they think they can shield the bad stuff from the investors.
  3. Communication decreases. The classic sign of hiding bad news is the “No News” syndrome. When everything is great, the news flows freely. Once the cadence stops, something is awry. We will see teams go from sending out monthly updates (if necessary, use words) to us repeatedly probing for updates. We understand that when things aren’t going well, it is very difficult to share the news. But it is precisely this character trait — being open and honest — that builds trust and relationships. Call the action on the field for what it is and your business will run better for it.
  4. The team waits until the very last minute possible to raise capital. The “we just want to get some more of our pipeline over the line before going out” phrase can backfire if a company’s numbers aren’t strong. In reality, our best teams over the years were always raising capital. We’ve written about this numerous times here here and here. The earlier a team gets on the road to talk to possible investors, the more confidence they have in themselves and their business and see fundraising not as a chore but as an important part of the business plan.
  5. Increased push back from management when deeper questions are asked. Many founders understandably are protective of their company and employees. They want to make sure they are in control and know everything that flows in and out of the company. When problems emerge, castle walls can sometimes strengthen. Later when an investor is flogged for asking for greater detail on something or a meeting with management is met with great resistance, this is not a good sign. This posture even seeps into fundraising when new investors try to probe on areas that are seemingly incongruent. When met with the same defensive reaction from management, new investors just asking legitimate questions will flee quickly and word spreads about the team.

It’s amazing to me that the smallest things will often stick out during our Investment Committee meetings. A proverbial mosaic is built at the end of the day of how teams answered this question or that, how their data room was organized, the thought put into the business model and pipeline, and even how many “I don’t know” answers came out in our conversations. It really is all about the team, and a fantastic thesis and idea will many times be overshadowed by how a team handles themselves.

Overselling will get you nowhere — best to be honest and open with investors and customers. You will be surprised how far this will go.

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