Nurturing trust: The vital pillar between investors and startup founders

In the dynamic world of startups, trust between investors and founders forms the bedrock of successful partnerships. Recent headlines highlighting instances of fraud have shaken the investment community. Here are some tips on how to build an effective and productive relationship.

“Fake it till you make it” and bubble funding environment

In the past few years raising capital was easier than before and capital flowing into the ecosystem surged, encouraging FOMO and an urgency to secure investments to capitalize on the perceived hype. In this type of bubble environment, “fake it till you make it” mentality becomes more prevalent, pushing some founders to compromise established norms and ethics that the industry always relied on. While as a founder you always try to depict an optimistic view of the company, there’s a fine line between being optimistic and flat out altering your numbers. Once this line is crossed, there is no going back.

Adi Gozes.

Recent fraud stories include student loan startup Frank, which was accused of fabricating customer data, Sam Bankman-Fried, founder of FTX, who is faced with fraud charges, IRL that was valued at $1 billion and admits 95% of its users were fake, and most recently the Joonko founder, who is being accused of fraudulent behavior. In these cases, founders misled investors and ignored the most fundamental building block of this relationship - Trust.

Founders and investors are partners

Some founders see their investors as these people who don’t understand anything about the business and try to share as little information as possible. But in fact, managing the relationship with investors is a crucial part of the startup cycle and relies on transparency, honesty, and a shared vision. In our view, when investors and founders trust one another, it lays the groundwork for effective decision-making and the ability to weather challenges together. We would advise not to see your investor as just a finance provider, since at the end of the day we all want the company to be as successful as possible.

At Entrėe, we try to actively support founders by providing mentorship, access to our networks, and resources that can help navigate challenges. We are empathetic towards the founders and believe that trusting founders during challenging times can help them navigate setbacks and emerge stronger.

Investors essentially make decisions based on what’s communicated to them, and make these representations to other VC’s etc. So founders cannot misrepresent any situation or information as that will always get found out, and at that point it will destroy trust, and can cause irreparable harm to founders’ and investors’ reputation in the market.

Entrée tips for building healthy relationship with your investors:

Open and honest communication

Transparency and open communication serve as cornerstones of any relationship. We encourage our founders to share both positive and negative updates, providing valuable insights to enable effective discussions. Ideally, founders should feel comfortable discussing challenges, seeking guidance, and addressing potential red flags promptly. A culture of open dialogue fosters trust, allowing both parties to work through obstacles and pivot when necessary.

Aligning expectations and realistic milestones

Setting clear expectations and establishing realistic milestones is crucial in building trust. Founders should present a transparent roadmap and demonstrate a deep understanding of their industry, target market, and growth potential. By aligning expectations, both parties can work towards shared goals.

Ongoing and periodical updates

We would recommend having ongoing conversations with your investors and sharing periodical updates (no fewer than monthly). In addition to periodical updates, before each board meeting it is advised to send the material ahead of time (at least a week) and seek feedback from each of your board members before the board meeting. Don’t leave negative surprises to the actual meeting.

For the ongoing communication, we would even advise to share the KPI dashboard with your investors. This creates incredible buy-in and full transparency.

Executive leadership

There comes a time in the startup life (typically Series A / Series B) where the founders need to build the executive leadership and bring in executives especially for finance and HR. Include these folks in the board meeting - you have nothing to hide. The finance and accounting function plays a vital role in maintaining accurate financial records, conducting audits, and providing transparent reporting to investors and stakeholders. The HR function is responsible for promoting a positive and inclusive work culture, managing employee relations, and ensuring fair and transparent HR policies and practices. Having strong leadership serves as a strong foundation for building a successful company.

Conclusion

We at Entrée believe that trust between investors and startup founders is a fundamental pillar for successful partnerships and for building successful businesses. In an era where trust between investors and startup founders has been tested, it is crucial to recognize the significance of this relationship and its importance.

Adi Gozes is a partner at Entrée Capital