Relationship with Investors

An on-going ponder for me is the difference between managers and entrepreneurs as classified by The E-Myth Revisited. One way to distinguish between the two may be by observing their relationship to the investors in their companies. A manager behaves like an employee of the company. This is particularly true in established companies where the shareholders hire a board of directors, the board of directors hire a CEO and the CEO or his or her delegates hire everyone else.

In contrast an entrepreneur is focused on realizing a vision of generating value. The simple rule-of-thumb for accomplishing this is an idea, skills, and money. In other words, money is just a component of the system they’re creating to generate the hoped for value. As such, investors are a supplier. They are not employers.

In any supplier/consumer relationship the consumer trades an asset that the supplier wants for a an asset that a supplier has that a consumer wants. Unfortunately, the asset often traded during business creation is an equity stake in the company. When this occurs the investor becomes a co-owner of the enterprise. This is fine if they also share the vision for the value creation system that the entrepreneur is building. When they don’t then it becomes death by a thousand cuts and eventually the business dies due to incompatible interests. Institutional investors, by the way, are particularly inept at building and sustaining value generating systems.

It’s my opinion that when building a business you should spend as much attention to selecting your investors as you do to selecting your employees; particularly if you’re trading equity. This, of course, may call into question the value of going public. Yes, you’re likely to get a large injection of cash, but at what cost?

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