How the complex relationship between a startup founder & an investor is similar to a marriage

So he eventually got out of the marriage by selling off the business he had founded. Inherently, the investor-entrepreneur relationship is complex because they are seeking different objectives, explains Rastogi. An investor’s primary job is to invest, grow his money and get good returns. For an entrepreneur, it is so much more about his passion and dreams. “Complications can be minimised by understanding each other’s ground rules,” he adds. And differences in opinion call for some hardnosed negotiations — and conviction in one’s stand.

A Balancing Act

Deep Kalra, co-founder of travel portal Make-MyTrip, has been there, succeeded in breaking such a deadlock with his investors, and five years later recounts a tale that pretty much took him to the brink.

In 2010, when Make-MyTrip was planning to get listed, the board, co-founders and investors were split down the middle on where the public issue should be done — in India or the US. Two large investors and some of the independent directors were keen on a US listing, whereas another investor and an independent director were emphatic on an India listing. Both sides held strong views. “It was a serious rift of opinion,” recalls Kalra.

Kalra looked for a way to sort this one out. He took time out. “Give me a week,” he told everybody. He sought out six-seven seasoned entrepreneurs with experiences in getting listed either in India or overseas — from Infosys’ Mohandas Pai to Rediff.com’s Ajit Balakrishnan He then made his conclusion. “Clearly, getting listed overseas made sense,” he says.

Distilling his information, he made his pitch to the board with empirical evidence. With logic and a clear rationale, the stalemate was eventually sorted. Make-MyTrip got listed on the Nasdaq with a $100-million IPO in 2010. With the offer price at $14, the stock today quotes at a 65% premium to the offer price.

Looking back, Kalra and his investors would consider themselves luckier than some of the founders and investors currently locked in ugly spats. Whilst not all of them get reported, according to media reports, PE deals worth roughly `3,000 crore are estimated to have been stuck in litigation at the end of fiscal year 2014.

Rifts Amid Boom

The first signs of unrest manifested around 2008-09 when the Indian economy hit a low and many investors — from PEs to VCs — found their investments under water. Difficult times had turned the relationship rocky. Founders of firms like Catmoss, Spykar and of course Lilliput made headlines with no-holds-barred spats with their investors.

Since then there have been many more fracases. In 2013, video aggregator iStream.com shut down due to issues with its investors.

Last year, the Bengaluru-based Nova Medical chain of hospitals dragged its PE investors Goldman Sachs and NEA to the Company Law Board. The same year the founders of SMILE Microfinance and its investor DWM Investments entered into a legal tussle. Such skirmishes are par for the course in the hurlyburly of entrepreneurship.

Famously, Apple’s Steve Jobs was ousted from the company he founded in 1995 when investors (who grabbed a majority of Apple’s board seats) felt Jobs was too young and temperamental to run Apple, and brought in Pepsi honcho John Sculley for the top job; Sculley predictably didn’t see eye to eye with Jobs, and got the board to trim Jobs’ wings; Jobs took the cue and left. More recently Twitter co-founder Noah Glass suffered the same fate due to differences with investor and CEO Evan Williams.

Clearly, feuds and fallouts are an inevitable part of a startup boom, one that India is firmly in the grip of. According to research firm Privco, VC funding in India surged 261% in 2014 to touch $3.86 billion against $1.06 billion in 2013. Some 1,200 new ventures emerged last year, and venture funds like Accel Partners, Kalaari Capital, SAIF Partners, which raised $1 billion in 2014 to invest in India, are on the road to raise another $2 billion for this year. (This, though, is still small beer compared to VC funding in the US, which stood at close to $40 billon in 2014.)

IT industry body Nasscom predicts that technology startups will maintain their momentum. Some 800 new tech startups were set up in fiscal year 2014; by 2020 that figure will burgeon to 11,500 startups, which will employ 2.5 lakh people (currently 65,000).

As startups mushroom, the number of investors too is burgeoning, with over 70 PE and VC funds, 62 angel investors and over 80 incubators and startup accelerators present in the country. Not all, of course, will end up fighting with founders.

Blissful Marriages

When it works well, it is bliss. “It is relationship like one with a life partner. You must learn to look together at the future world,” says Vijay Shekhar Sharma, founder, Paytm, a mobile wallet company. He shares a great rapport with Ravi Adusumalli of SAIF Partners — which owns a little under 40% stake in One97 Communications Ltd, which owns Paytm — who is the representative partner. “He is like my co-founder,” adds Sharma.

They have frequent conversations — as many as seven a week — on topics from operations to key performance indictors to talent issues. “Our business is exploratory and changing rapidly. Constant chats help us remain in sync in a fast moving industry,” explains Sharma.

For instance, when Sharma was changing his business model from a value-added services player for telcos to e-commerce he was also having constant chats with Adusumalli, as a result of which the investor trusted him and backed him. Sharma’s new vision statement, “Go Big or Go Home” came from Adusumalli when they were in the US attending a conference and catching up over coffee one evening.

Not that there have been no differences. While raising his series B funding in 2008, Sharma was keen to bring a new strategic investor on board. The process was taking too much time — eight to ten months. “I was spending a lot of time to raise the money. They were saying take the money from us.” Sharma prevailed eventually, getting Intel Capital as another investor.

Serial entrepreneur K Ganesh, who has dealt with 15 VCs so far — from Sequoia to Light Speed to Accel Partners — has had few reasons to gripe. “With our past relationship, there is a relative comfort for both parties,” he says. Honest, transparent, and constant communication is a must, Ganesh advises.

He recalls his Customer Asset startup days in 2000, bang in the middle of the dotcom bust. eVentures, from whom he raised funds, was shutting down and exiting India for global reasons. Despite the tough situation, the people at the helm of eVentures India, like managing partner Neeraj Bhargava, made it a little easier. “There was no bullshitting. Neeraj was upfront and candid, and handled it with lot of maturity,” recalls Ganesh.

Ganesh’s advice for a smooth founderinvestor relationship: treat it like a marriage — troubles will come in multiple forms — treat the investor like a partner, a co-founder.

Food entrepreneur Anjan Chatterjee, who’s managing pretty well the eightyear-old relationship with SAIF Partners in his company Speciality Restaurants, points out there has been a lot of give and take. What he got from SAIF is lessons in financial discipline and in scaling up. “You need to keep your ego aside and treat them as partners,” adds Chatterjee.

The Accusations

Entrepreneurs have at times accused investors of forcing them to sign one-sided deals. Some also allege dishonest intent. While doing due diligence before investment, investors have access to a lot of confidential information. And then they go and invest in the competitor.

Despite the routine legal cover like nondisclosure agreement (NDA) clauses, the entrepreneur is completely exposed. Sanjay Mehta of Social Wavelength, a social media analytic firm, says stories abound on anonymous social network apps of such short-changed entrepreneurs venting their anger against their investors.

Investors, for their part, have their own horror stories to share. Cautious and suave, most refuse to talk of specific cases but without taking names they related tales of entrepreneurs who cook numbers and hide information.

Sasha Mirchandani, founder of VC firm Kae Capital, says some of the biggest areas of concern are milestones not being met, the company moving slowly in the market and nasty surprises when the investors are not kept in the loop. “When startups burn cash too fast, it becomes a big issue,” he adds. As India’s startup ecosystem evolves, expect entrepreneur-investor conflicts to rise. The experience in the US offers some clues.

The Silicon Valley View

India’s startup ecosystem, though maturing, is still far behind the evolution that the Silicon Valley has undergone. For instance, investors there are far more colblaborative. “They often become partners in fundraising, bringing along other investors. In India it is largely a single investor deal,” says Rastogi. Another big difference is the background of the investing community. In the US, many seasoned entrepreneurs, after exiting their ventures, join a VC firm as a partner.

Their entrepreneurial background comes handy in their role as an investor. In India, investors have a banking skew, with many coming from investment banking. “This makes a huge difference,” says Amit Ranjan, cofounder of Slideshare. If you look at all the big deals, “the investors are betting on very transactional [often proven] kind of business models [mostly in the ecommerce space],” says Ranjan.

Their risk appetite to make bets on new unproven areas is low. As a result, a big consumer internet company — such as Facebook, YouTube, Instagram — is unlikely to come out of India in the near future. “These consumer internet companies must have investors with risk appetite and long-term horizons. This is still not easy in India,” adds Ranjan.

Shifting Landscape

But things are changing in India. “We have all grown up — startups, investors, funds and even the ticket size,” says Ashish Gupta, cofounder at Helion Advisors.

This is bringing in new complexities in the investor-entrepreneur relationship. For one, entrepreneurs are better networked, more experienced and have higher expectations from their investors. Investors in turn are building organisational depth to meet their needs. Helion Advisors co-founder Sanjeev Aggarwal says Helion has created a portfolio of services — from organisational development to financial compliance — to help investee companies.

To be able to understand young entrepreneurs, it is deliberately hiring young staff. Helion has at least five executives in their 20s today as compared to just one five years ago.

“Investors must behave younger,” says Gupta. Clearly, it is difficult for startups to attain size, scale, fame and fortune on their own. Sooner than later, the bold and the ambitious will have to tie the knot with an investor. But when they do and look forward to eternal bliss, they should also keep actress Zsa Zsa Gabor’s priceless two-liner in mind: “A man in love is incomplete until he has married. Then he’s finished.”