Investors don’t bet on you…they hedge on you! (published for Linkedin)



It is no secret that same set of investors invest in similar type of companies.  They invest in startups and hedge their investments by investing in similar business ideas run by different people.

It is a big lie when investors say that they are betting on a startup team.  They aren’t always convinced that a particular entrepreneur will win.  But they know that whosoever will emerge as a leader, they will be able to consolidate their other ‘assets/investments,’ in that company.

It happened in India in e-commerce in 2013 when LetsBuy got acquired by Flipkart, both backed by Tiger Global and Accel Partners.  Same is happening in FoodTech these days.  This phenomenon necessitates the need for right mentors.

Right mentors to a start-up are akin to spinal cord to a body. In India, since the start-up culture is only about decade-old, there is a dearth of mentors who can help the first-time founders navigate the tricky business environment. Besides building and testing the product, most of the founders’ time goes in pitching to investors, selling to customers, recruiting employees, and marketing to industry and press. Mentors can help in various aspects through connections and advice.

There is a pervasive traditional thinking in the start-up ecosystem, however, that good mentors are the ones who also invest in the start-up. Line of reasoning is that strategic investors not only bring-in money, but also connections and experience onboard a start-up. As such, entrepreneurs look for smart money.

I would encourage us to examine this reasoning.  I believe it is important for a start-up to clearly identify and differentiate their advisors from investors. If your advisor and investor are the same, there is a strong possibility of a conflict of interest. Investors, whose prime motivation (generally) is a good return on capital, might not be best positioned to offer the ‘right advice’ to the entrepreneurs. Advisors or mentors can act as a sounding board for the entrepreneur in negotiating and dealing with investors.

Advisors for a start-up should be seen in the same vein as independent board of directors (BoD) are viewed for large corporations. Such BoD helps check management, which may take decisions for achieving short-term goals at the risk of long-term sustainability of the company. In case of start-ups, the role of the advisors should be to protect the long-term interest of the company and its founders against the short-term financial motives and/or compulsions of investors.

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