Earlier this week, I participated in a panel discussion organized by Holland & Hart, a Denver-based law firm that has a strong practice area working with entrepreneurial growth-stage businesses. The topic of the panel was “After the Honeymoon”, focusing on investor/entrepreneur relationship dynamics in the critical period following the closing of an investment or acquisition transaction. Also on the panel with me were Matt Hicks of Excellere Partners and Flint Seaton, CFO of Accellos, an Accel-KKR backed business.
The discussion was principally focused on investor/entrepreneur relationships in the context of growth equity style investments. We had a wide-ranging discussion hitting on topics that included financial forecasting, strategic planning, executive team recruiting, and many others. Each of those specific areas matters a great deal. But no matter which element of the work that goes on between investors and entrepreneurs during the post-investment period the panel discussed, the conversation returned to two key concepts - alignment and trust. Alignment and trust set the tone for how investors and entrepreneurs work together. Investor/entrepreneur coordination works great when both are in place and poorly when either is not.
Alignment is a straightforward concept, the goal being to harmonize expectations between the investor and the entrepreneurs. But it doesn’t just happen. You don’t stick and investor and an entrepreneur in a room expecting that they are automatically “aligned”. Creating alignment takes work. Trust is a more nebulous concept. But suffice to say that once trust between an investor and an entrepreneur is violated, it is hard to recapture. There are more ways than you can count to violate trust.
So how does are investors and entrepreneurial management team’s supposed to derive alignment and trust? It is my strong opinion that if an entrepreneur is working to drive alignment and build trust with an investor (and vice-versa) after a transaction has closed, it is already too late. The time to begin working on the fundamental building blocks of a successful entrepreneur/investor relationship is before the transaction gets closed. The benefit… everyone knows what is expected of them day 1, day 30, day 100, … and there is no lag between the Company taking capital and management’s execution of an agreed to plan of attack.
We like to perform a strategic planning session with management teams we want to back before the investment closes. We expect that our management teams to use the results of the strategic planning to derive operating plans. We do this annually with each of our portfolio companies, but in the case of a new investment, we expect that the strategic plan be crystallized into a 30-60-90 day post investment execution plan before the investment closes. The benefit of going through this exercise (which is a lot of work for everyone) is that management and the investors know exactly what to expect of each other during the critical months following the investment. There is also a built-in trust builder baked into the pre-investment strategic planning process. It takes a lot of trust on the part of management to bring a prospective investor into the intimate thoughts of a management team, particularly when that planning is likely happening simultaneous with a diligence process. Teams that are willing/able to go into a strategic planning session with a prospective investor are saying, through their behavior… “I have nothing to hide. I’m comfortable expressing the good, bad and ugly about my business and you are going to want to invest despite having heard it all.” An investor that goes through that process with a management team and follows-through with the investment is saying… “I know about all of your imperfections; I acknowledge them and I love you despite them.”
Pre-investment strategic planning isn’t the only way to build alignment and trust between an investor and an entrepreneurial management team, but its a pretty darn good starting point. Investors and entrepreneurs need to lay the groundwork for alignment and trust before the closing of a new investment. Everything becomes easier with alignment and trust in place… If the right alignment and trust aren’t there, don’t proceed with the investment; that goes for both entrepreneurs and investors.
Thanks to Holland & Hart for hosting the event and to Matt and Flint for being great co-panelists. I had fun participating.