Train your investors to behave.
Last week I wrote about toxic investors being a mark of an ecosystem that’s still immature, one that doesn’t properly support founders. In essence, that kind of ecosystem can only get better once founders manage to gain the upper hand and defuse the worst practices coming from the investing side of things.
For instance, one of Jeff Bezos’s most admirable qualities is how he managed to “train Amazon’s investors to behave”, to quote a 2013 HBR article by Justin Fox:
What’s really going on is that Jeff Bezos has trained elements of the investment community to expect that low profits (or big losses) now represent investments that will eventually pay off, not signs of trouble. How has Bezos done this? Well, he’s a hedge fund veteran who has always taken a skeptical view of Wall Street, treating it more as a loopy rich uncle than the efficient information processor of standard finance theory. When Uncle Wall Street (also known as Mr. Market) is in a generous mood, Bezos is always ready to take advantage by putting investment ahead of profitability. But he’s also always been ready to shift gears when the mood turns stingy.
Are there lessons that early-stage founders can derive from Bezos’s track record in taming investors in Amazon’s cap table? I’d say yes:
Antagonism is normal in a founder-shareholder relationship. Investors know Bill Janeway’s First Law of Venture Capital, which is that “All entrepreneurs lie”. Likewise, entrepreneurs should keep in mind that their alignment with investors can never be perfect: their company is usually all they have, while their shareholders are diversified across a large portfolio.
Not all investors are wired to deploy capital in high-risk ventures. Hard things such as uncertainty, optionality, and patience are difficult to understand for those who think tech startups are like any other business venture. Sadly, some situations are hopeless; in others, it’s up to the founder to educate investors on this new asset class they’re experimenting with.
The context of a bubble obviously makes it easier for founders to grab an advantage. And what was possible for Bezos during the dotcom era might not be replicable in a more ordinary context. Bubbles are good in that regard: they attract non-venture investors into venture capital and provide them with an education, and they minimize the expectations regarding profitability.
Your CFO will eventually make a huge difference. Most of what Bezos achieved from a financial perspective back in the day was thanks to a less-known but still important figure in the history of Amazon: the late then-CFO Joy Covey, who was making sure Amazon’s finances were in order regardless of the surrounding uncertainty (listen to this podcast to learn more about her).
High-quality professional services matter, too. This is not the sexiest part of ecosystem building, but it’s really important to have lawyers, accountants, and others who know what startups are about and who can deliver the best services to support smooth investor relations. Make sure to work with good firms, and realize that in a toxic ecosystem, those are scarce—if they exist at all.
The best signal you can send is that you’re in control. Ultimately, good investors are aware of Janeway’s First Law of VC and of the fact that, well, in the startup world, sh** happens. The point you need to make is that, beyond the storytelling, you’re capable of navigating adverse circumstances, which is best done with Bezos’s frequent check-ins with reality:
“We believe in the long term, but the long term also has to come,” says Bezos, explaining that periodically Amazon wants to “check in” with its ability to make money.
Want to get better at finding good investors and then training them to behave, the Bezos-Covey way? Join The Family’s next batch in September!