Reflex Capital → Blog → The investor is not a patron
Every investment transaction is essentially a bet on the person of the founder and their vision. There is usually nothing else in a startup.
The founder, few people around them, an idea, a product in some stage of development and, in the best case, few customers who are willing to pay something to use the still unfinished product in the hope that it might one day give them some competitive advantage. And that vision is at least a little idealistic in principle, because the founder of the startup cannot imagine what all is in store for him. The investor knows this, so he discounts the vision right away because he has already discovered that economic indicators behave in a somewhat perverse way in a startup. Costs are like a flock of sheep that breed faster than the shepherd anticipated and the budgeted pasture is not enough for them, while revenues behave like a bear that didn’t notice that it’s already spring and forgot to come out of its den.
On the cost side, there is always something that was not counted on, and sales tend to be delayed because there is a very long road from the customer’s “I quite like that” to the money in the bank, full of obstacles and delays… the development of the new version takes a bit longer, the lawyer doesn’t have time to do the contract right away, the manager who has to approve it has gone on vacation, the people who were supposed to test it just had to urgently deal with something else. And the fact that the sales come in a week or a month later wouldn’t be such a big deal if the wages, rent and other expenses didn’t have to be paid every month on a fixed date.
So no matter how big the investment was, the money will run out sooner or later. The faster the business grows, the faster it will run out. But that’s the better case, because in a business that’s growing fast, the original investor will be happy to add more money or the company will find someone else to do it for them. The fact that EBITDA will be a little bit redder was anticipated. Worse is when the money runs out but the bear is still in the den. If it happens once, it’s understandable. Start-ups sometimes take a while, and when the business is growing fast, every now and then something goes wrong. It’s just that when bright futures are planned year after year, costs are consumed, but the business still somehow doesn’t grow, it doesn’t help the company to go to an investor and wear a pleading face. When it’s the umpteenth time in a row, even the dog eyes won’t help and the investor won’t pull another treat out of his pocket.
The investor is not a patron. Investing is a business and business is making money. An investor is happy to help a startup fulfill its vision, but he needs to make a profit. He too has his investors and they are not entrusting him with their money to play Rudolph II and fund the development of the elixir of youth. An investor can’t keep putting more and more money into a stagnant company and hope that maybe one day in the future something will change. If he has the competence, he can advise and help … change the way he sells, adjust the business model, use a different technology, improve marketing, replace people in management positions. He’ll try once, twice, three times … but if even that doesn’t work, something is wrong.
Either the original vision was a chimera, or the company has taken a path that doesn’t lead to the goal, or the problem is with the founder and the investor has bet on the wrong horse. And since even the investor has no money and capacity to spare, he has to spend his time and effort mainly on companies where it works, to make it work even better. So he wipes away a tear in his eye and the company hears the harsh, “Sorry, but you’re on your own.”
August 3rd, 2022 • Ondřej Fryc
I didn’t get it before either. I had an investor, a co-shareholder, a partner in my company. I put everything I had to the company. All my time, all my money. I pledged my house, gave up my salary. But in hard times, it was not enough. I went to my investor, and I expected them to provide some much-needed money, because he had the cash. And he surely wants to save his previous investment, right?
