⚡ The Funder Founder Conflict
More and more instances of clashes between founders and investors are now making headlines. So, here we are to dig deeper into this issue.
Ever wondered why startups go the bootstrap way (founders funding the company instead of taking in investor money)?
There are a few successful startups like Zoho and Zerodha that have made it to the top without raising money or by raising very little money from investors.
But why take the pain to do this when investor money is relatively easily available nowadays?
Because of stories like Trell and BharatPe.
The Funder Founder Conflict
Social commerce platform Trell has been in the news lately, thanks to a recent conflict between investors and founders.
In FY21, Trell witnessed a loss of Rs. 78.4 crores, which is a 550% increase from last year.
This insane increase raised suspicions and investors ordered an audit of the company.
Seems pretty straightforward, no?
Nuh-huh. The founders or the board of the company was not consulted before the audit. The investors kind of went behind their backs.
This has angered the company's founders who have asked the investors in question to come forward.
The move has also had negative consequences for Trell.
Its upcoming funding round, which would have given it unicorn status, has been shut down. As a result, it is facing a cash crunch and has had to lay off a huge chunk of its workforce.
Now, we know very little about this whole saga to side with the founders or investors. But this debacle has forced us to look into the funder-founder conflict, which has been surfacing time and again in different ways and forms.
For instance, in the whole BharatPe saga (which we have stayed away from because of a lack of clarity), ex-founder Ashneer Grover claimed that the company's investors wanted him out. And now he wants his next startup to be completely bootstrapped.
Even Sachin Bansal, ex-Flipkart founder, has ensured that in his second innings, IPO bound Navi, he has more than 97% holding.
But why are they choosing this route?
Well, many times founders are forced to leave the company that they built from scratch.
There could be several reasons behind this. But more often than not, it is because investors want someone who will run things according to them.
Okay, but if the investors can take the company to new heights, shouldn't the founders be happy?
Here's the catch: investors and founders often have different visions and different goals. And this friction between them can be a major cause for a company's downfall.
Plus, investors and venture capitalists often benefit when a company fails. How?
Many of them have preference shares in the company. So, they get a preference when the company shuts shop and liquidates its assets. This is often the quickest way for investors to get back their money.
Other quick ways to get returns on their investment: selling the company or leading it to an IPO.
Now, both these avenues could be bad for the founders.
Selling the company could be good for the founders financially but brings an end to their dream project. Plus, more often than not, the buyers are not interested in the whole company, just its tech or workforce. So, they shut it down.
Wait, why is an IPO bad?
Because it can sometimes lead to debacles like the Paytm crash. Sometimes an IPO is just a way for VCs and initial investors to exit the company. So, they increase the stake sale in an IPO or influence the investee company to increase its price. Something similar happened with Paytm. Paytm’s IPO had a fresh issue of only 45%. The rest of the money raised went into the pockets of existing investors who wanted an out (Offer for Sale).
To Raise Money or Not to Raise Money?
Now, you may be thinking that if companies can't raise money from investors, how will they grow?
That's true. Companies cannot stop taking money from investors but they can be careful about fundraising.
Choosing an investor is very much like choosing a life partner. Their goals and values should be aligned with the founders and the purpose of the company.
This will ensure there is less friction and the company can function smoothly.
Founders should also not dilute too much equity right in the beginning as it reduces their hold over the company.
As Grover suggests, founders should hold on to at least 51% equity in their companies so they can call the shots.
Or be ready to say goodbye to their initial vision :)
What appeals more to you? A bootstrapped, profitable company or a venture-backed, hypergrowth startup?
Shantanu’s take: Sometimes the founders have to choose between the rock and a hard place: dilute too much, and you lose control, dilute too little and risk being overtaken by a competitor.
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