The relationship between an entrepreneur and hers or his investor can in some ways be compared to a marriage. The KTH-researcher Andreas Fili has studied how to handle conflicts and get the relationship to blossom.
Most of the research about the relationship between investors and entrepreneurs is about the courtship phase. What do you do as an entrepreneur to get a person to invest their private money and time in your comapny.
Andreas Fili, who works at the department of banking and finance at KTH Royal Institute of Technology, was interested in what happens after the happy couple have found each other. His dissertation builds on interviews with 21 angel investors within tech and life science, as well as numerous interviews with entrepreneurs.
“It’s quite difficult to study a long term relationship, methodologically speaking. I had to take on the role of a relationship therapist and ask ‘Who said what and when? What happened then and how did you find the way back to a good relationship?'”
Often when entrepreneurs and investors work very close together they develop a personal relationship as well as a business relationship. But the fact that one of the two “owes” the other one thousand or millions of dollars cannot be ignored.
How do you build a good relationship?
“You start by working really hard together to solve important problems. By always being there for each other, even on christmas eve and new years, you start building trust. The angel investors shows that he or she is willing to become a part of the team and work under the same conditions as the entrepreneur. But everyone that I’ve talked to confirms that conflicts will pop up sooner or later”.
How do you solve those conflicts?
“My best advice is to play ‘good cop, bad cop’. The investor can refer to a third party to get the message through to the entrepreneur. He or she can say something like this to the entrepreneur: ‘These numbers are really awful, our accountant is really worried. We have to turn this around!’ That’s a very effective way to keep a strong relationship without anyone losing face.”
What if they still want to separate?
“That’s something you want to avoid, whatever the cost. According to my angels, the money is gone when that happens. There are few people who want to buy shares in a company where nothing gets built and no one is getting along.”
What is the driving force for an angel to invest?
“Many of them are already financially independent, so it seems to me like it’s more of a lifestyle choice. Instead of becoming elite athletes these people went into the business world. Some researchers also argue that altruism is an important factor. The angels want to give something back to their town and feel needed.”
3 tips for an entrepreneur/angel investor relationship
- The entrepreneur should try to find the ‘right’ angel. Angel investors are different kinds of people and have experience from different industries. Get some references, you will probably share many years after the investment has been made.
- If the angel is a part of an angel network, that can mean both more and less freedom for the company. Other angels can be helpful in conflicts.
- Make it clear early on what the investor and CEO should be doing. That way, the work becomes more focused, and if a problem appears, you know immediately what department you need to seek help from.