Angel or Devil: Who’s Really Investing In Your Start-Up?

Angel or Devil: Who’s Really Investing In Your Start-Up?

by Nir Eyal  |   11:00 AM November 1, 2013

A friend called me heartbroken, crying. She had spent months looking for investors to fund her fledgling startup and now she had a big problem. Someone was ready to give her the money. Trouble was, the cash came with a catch. The only investor willing to pony-up the money was someone she didn’t like. She also got the feeling he did not like her much either, and yet, he wanted to invest. “If he was involved, I have the feeling I would quit my company down the road,” she told me over the phone. Time was running out; she needed the funds and with no other investor ready to commit, she feared she’d have to take the money from someone she couldn’t stand. The very thought made her sick in the stomach. I felt for her and her dilemma piqued my curiosity. What differentiates a great early-stage investor from someone no entrepreneur wants to take money from unless they absolutely have to?Negative Value

Last month, famed investor and Sun Microsystems co-founder, Vinod Khosla, shocked a tech conference audience claiming, “95 percent of VCs add zero value. I would bet that 70-80 percent add negative value to a startup in their advising.” Can Khosla be right? Can investors be a liability rather than an asset?

“I don’t know a startup that hasn’t been through tough times,” Khosla said, and it is during these rough patches that he believes many investors fail their companies. But there are more ways an investor can screw a company than giving crummy advice.

A classic Harvard Business Review article demonstrates how investors can negatively impact the psyche of startup founders, often with toxic, long-lasting repercussions. The paper’s authors, Manzoni and Barsoux, describe a disorder they call the “set-up-to-fail syndrome.” Though they focus on how this affects the manager-to-employee relationship, I believe the affliction can also manifest in the context of an investor-to-founder partnership, particularly when a first-time entrepreneur is involved.

What is this sabotaging syndrome? It begins innocently enough. The chain reaction usually begins with the “tough times” Khosla says are part of every company’s lifecycle. Sometimes the investor has pre-existing doubts about the CEO’s abilities, but the infection usually starts when the company misses a minor target or isn’t progressing as quickly as anticipated.

When things do not go as planned, many investors increase supervision of the company and its CEO. The investor’s doubts in the founder begin to show through subtle cues like body language and tone, as well as in not-so-subtle ways like sending emails asking for more frequent progress reports. The investor may also initiate lengthy discussions, wanting to know how the company intends to get itself back on track.

The investor’s questions are legitimate — it’s his or his firm’s money after all. But the byproduct of the increased scrutiny is the deterioration of the founder’s confidence and creativity. The entrepreneur suspects the investor is losing faith and responds by overcompensating in an attempt to fight the investor’s perception.

The CEO may start working at an unsustainable pace and demand the company’s employees do the same, squandering mindshare and team morale on unnecessary tasks to placate the investor. Fearful of further disappointing her patron, the CEO may unintentionally paint a rosier view of the company or stop asking for critical feedback.

As the founder shares less, the investor interprets the CEO’s closing-up as an inability to surface problems — a sign of poor judgment and a lack of competence. The investor becomes increasingly frustrated and is now convinced that the CEO requires further oversight.

As the study’s authors point out, “Perhaps the most daunting aspect of the set-up-to-fail syndrome is that it is self-fulfilling and self-reinforcing — it is the quintessential vicious cycle.”

Taking cues from the more experienced investor, the first-time CEO begins doubting her own abilities. She begins performing her job mechanically, avoids risk-taking and spends more time and energy catering to the investor’s requests. The CEO’s self-doubt fuels poor performance, validating the investor’s suspicions and throwing the company into a self-perpetuating death-spiral, which leaves the once-promising CEO dazed, confused, and often times, out of work.

Stopping the Syndrome

The tragedy of the syndrome is that it is fueled by good intentions. The founder wants nothing more than for the company to succeed and the investor has no intention of destroying value in a company he’s invested in. But according to Manzoni and Barsoux, how people with power react in times of trouble can have a considerable and often deleterious impact on others.

But the set-up-to fail syndrome is preventable and reversible. Both entrepreneurs and investors can take steps to vaccinate themselves from the disease.

When my friend faced the unfortunate choice between an investor she did not want to work with and the potential death of her fledgling company, she had a difficult decision to make. In her case, she decided to keep looking for other investors, believing that starting a company with the wrong person was worse than not starting a company at all.

But merely finding a good investor is not good enough. Even well-meaning angels can become devils when conditions are challenging.

An antidote to the syndrome is to acknowledge how people in positions of authority influence the performance of others. Whether it involves investors, bosses, or managers, any supervisory relationship can fall prey to a breakdown of confidence. Investors must beware of the trap of labeling founders as deficient and instead stick to judging objective outcomes and circumstances.

In addition, expectations about the degree of supervision should be set early in the relationship. Companies that institutionalize regular dialogues between hierarchies can head-off the syndrome before it gets out of control. A similar practice can help CEOs and investors get along.

Perception Matters

For their part, company founders can prevent the onset of the syndrome by understanding its potential impact and guard themselves from the performance drains that come from the downward spiral.

The set-up-to fail syndrome can only continue if the CEO perceives that the investor is losing faith in her abilities. Ultimately, founders and investors are on the same team and both want the company to thrive. Therefore, regardless of what the devil investor may say or do, the startup CEO must perform a bit of mental acrobatics to keep her sanity.

If the perception of disappointing an investor is getting in the way of guiding the company, the entrepreneur must choose another point of view. Founders must ward-off the demons of self-doubt by never interpreting investors’ actions as, “You are failing,” but rather, “I want us to succeed.”

Real Angels

In my own experience having worked with several fantastic investors, it was always the great ones who not only had insight, but also the humility to confirm that the CEO knew best. Even during the company’s tough times, interacting with real angels leaves the entrepreneur energized, confident, and more creative than before.

The best angels remain faithful in the face of uncertainty and help CEOs rise to the challenge. They imbibe founders with an omnipotent sense that they can do anything. In short, real angel investors make founders feel like Gods.


The Set-Up-To-Fail Syndrome

by Jean-François Manzoni and Jean-Louis Barsoux

When an employee fails—or even just performs poorly—managers typically do not blame themselves. The employee doesn’t understand the work, a manager might contend. Or the employee isn’t driven to succeed, can’t set priorities, or won’t take direction. Whatever the reason, the problem is assumed to be the employee’s fault—and the employee’s responsibility.

But is it? Sometimes, of course, the answer is yes. Some employees are not up to their assigned tasks and never will be, for lack of knowledge, skill, or simple desire. But sometimes—and we would venture to say often—an employee’s poor performance can be blamed largely on his boss.

Perhaps “blamed” is too strong a word, but it is directionally correct. In fact, our research strongly suggests that bosses—albeit accidentally and usually with the best intentions—are often complicit in an employee’s lack of success. (See the insert “About the Research.”) How? By creating and reinforcing a dynamic that essentially sets up perceived underperformers to fail. If the Pygmalion effect describes the dynamic in which an individual lives up to great expectations, the set-up-to-fail syndrome explains the opposite. It describes a dynamic in which employees perceived to be mediocre or weak performers live down to the low expectations their managers have for them. The result is that they often end up leaving the organization—either of their own volition or not.

About the Research

The syndrome usually begins surreptitiously. The initial impetus can be performance related, such as when an employee loses a client, undershoots a target, or misses a deadline. Often, however, the trigger is less specific. An employee is transferred into a division with a lukewarm recommendation from a previous boss. Or perhaps the boss and the employee don’t really get along on a personal basis—several studies have indeed shown that compatibility between boss and subordinate, based on similarity of attitudes, values, or social characteristics, can have a significant impact on a boss’s impressions. In any case, the syndrome is set in motion when the boss begins to worry that the employee’s performance is not up to par.

The boss then takes what seems like the obvious action in light of the subordinate’s perceived shortcomings: he increases the time and attention he focuses on the employee. He requires the employee to get approval before making decisions, asks to see more paperwork documenting those decisions, or watches the employee at meetings more closely and critiques his comments more intensely.

These actions are intended to boost performance and prevent the subordinate from making errors. Unfortunately, however, subordinates often interpret the heightened supervision as a lack of trust and confidence. In time, because of low expectations, they come to doubt their own thinking and ability, and they lose the motivation to make autonomous decisions or to take any action at all. The boss, they figure, will just question everything they do—or do it himself anyway.

Ironically, the boss sees the subordinate’s withdrawal as proof that the subordinate is indeed a poor performer. The subordinate, after all, isn’t contributing his ideas or energy to the organization. So what does the boss do? He increases his pressure and supervision again—watching, questioning, and double-checking everything the subordinate does. Eventually, the subordinate gives up on his dreams of making a meaningful contribution. Boss and subordinate typically settle into a routine that is not really satisfactory but, aside from periodic clashes, is otherwise bearable for them. In the worst-case scenario, the boss’s intense intervention and scrutiny end up paralyzing the employee into inaction and consume so much of the boss’s time that the employee quits or is fired. (For an illustration of the set-up-to-fail syndrome, see the exhibit “The Set-Up-to-Fail Syndrome: No Harm Intended—A Relationship Spirals from Bad to Worse.”)

Perhaps the most daunting aspect of the set-up-to-fail syndrome is that it is self-fulfilling and self-reinforcing—it is the quintessential vicious circle. The process is self-fulfilling because the boss’s actions contribute to the very behavior that is expected from weak performers. It is self-reinforcing because the boss’s low expectations, in being fulfilled by his subordinates, trigger more of the same behavior on his part, which in turn triggers more of the same behavior on the part of subordinates. And on and on, unintentionally, the relationship spirals downward.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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