John is an enthusiastic tech startup founder who has a meeting with Natasha, a bright venture capitalist and investor with a knack for spotting potential unicorns.
John: We have built a product which might you be interested in.
Natasha: Is that so? Let’s see what you’ve got.
John: …… (John begins to explain the product, problems the product solves, market fit, competitors, USP, etc)
Natasha: Wow, that sounds great! You’ve got a really superb idea here, John. So, I think you must have had some initial traction in terms of revenue or number of users, right?
John: Yes, we have had some revenue over the last few months.
Natasha: Brilliant! Could you please share the financial statements of your startup for the last 2 years. I would like to see some numbers, just to lay out the initial groundwork.
What John says now could make or break the deal with Natasha. As they say, you don’t get a second chance to make a first impression.
[Scenario 1] John: Yes, of course! I have them right here. *gives Natasha the folder*
[Scenario 2] John: My books are yet to be prepared. I would need a week’s time to send you that.
I leave it to the readers’ judgement as to which response would look more professional and create the first impression with the Investor.
Many founders are of the view that if the product is good and they show some initial traction they end up having investors on board. This is true to some extent. However, a large number of investors have burned their hands investing in wrong founders.
Alex Rodriguez, the champion baseball player turned investor said on Shark Tank, “I invest in the jockey rather than on the horse.” As with Alex, most investors prefer to invest in the founders rather than the product and their ability to pull off the vision.
Few founders might ask “Just because I don’t maintain the books of accounts I might not have the investment? This is not convincing.”
It is not that the investment is totally based on the aspect of maintenance of books of accounts. It is about establishing the discipline before the Investor that the Founder possesses by ensuring the highest corporate governance standards in their startup.
Many investors wants to ensure the startup they invest in maintain the highest standards of Corporate Governance for the following 2 reasons:
- Investors don’t want their investment amount to end up being used for paying penalties and fines and other fees which can be avoided.
- They don’t want their valuation to get hit in the upcoming rounds because of the non-compliance of the startup.
So, how do the investors ensure that the compliance will be up to date post their investment? Only if the Founder exhibits this discipline before the investment even comes in.
Trust me, this is true. The cost of compliance is not a sunk cost. The benefits out of keeping your startup fully compliant will definitely outweigh the cost.