The importance of trust between startup founders and investors

Most startup founders have an uncanny ability to suspend disbelief when it comes to the future of their venture. They’re always in sales mode – to themselves, early customers and investors, and the world in general. Startups that are on the brink of huge success are often also on the brink of spectacular failure, the line between the two extremes is often wafer thin.

Early stage startups, by definition, are almost always missing something as they iterate on product-market fit. Meanwhile, early stage angel investors can often see past these shortcomings due to their experience and learnings from their own mistakes, and provide the care and nurturing to founders needed to unlock success.

Investors focusing on early-stage startups understand this reality and accept the associated risks in anticipation of making bets on founders working on ‘10X’ ideas to realise outsized rewards. This relationship between founders and investors is a key ingredient to startup success, and isn’t just from a commercial perspective, but at a personal level – rapport, respect, mentoring and trust are vital.

Early stage investors invest because they believe in the founder at a personal level. There is something about you, and your idea that convinced them that you could make it happen. Usually, it is just a feeling and not some tangible thing they can put their finger on. Ironically, most angel investors will imagine a future version of a startup far more enticing than most sane founders are willing to pitch.

The startup game isn’t for everyone – it isn’t really for most people. At the end of the day the most likely outcome is failure, even angel investors expect most of their bets in startups to fail. In this cauldron of uncertainty and high-stakes, the most important element of the founder-investor relationship is trust.

Startup founders have the singular authority to address high-stakes challenges and make tough decisions. However, to a large extent their autonomy rests on the willingness of the investors to cede it to them. In other words, it depends a lot on investor’s trust. Leaders who violate that trust soon find themselves ousted – Travis Kalanick, whose brash and at times inappropriate behaviour repeatedly raised eyebrows at Uber, was blamed for creating a toxic culture and forced to resign by an investor revolt.

Founder trust has also been eroded by Mark Zuckerberg at Facebook. In April 2018, Zuckerberg was before Congress and questioned about Facebook’s commitment to data privacy after it came to light that the company had exposed the personal data of 87 million users to Cambridge Analytica. Then in September 2018, Facebook admitted that hackers had gained access to personal information of 50 million users. Then a New York Times investigation revealed Facebook had given Netflix, Spotify, Microsoft, Yahoo, and Amazon access to its users’ personal data, including in some cases their private messages.

So when Zuckerberg announced that Facebook would launch a dating app, I shook my head. And then they announced releasing an app that allowed people to share photos and make video calls. Why would anyone trust Facebook with personal data on something as sensitive as dating, or with a camera and microphone given its horrible track record?

Our need to trust and be trusted has a very real economic impact. More than that, it deeply affects the fabric of society. If we can’t trust other people, we’ll avoid interacting with them, which will make it hard to build anything, solve problems, or innovate.

Startup founders can’t build trust unless they understand the three fundamental promises they make to investors and the resulting responsibilities: economic – to provide value to customers that enhance their lives; legal – that they will follow the letter and the spirit of the law; ethics – investors want founders to behave with integrity.

To investors, if founders repay the trust of investment made by delivering the above promises, it means returns; and to society, it means growth and prosperity. But trust is fragile, it waxes and wanes. It means being competent, playing fair, and most of all, acknowledging and, if necessary, remediating, all the impact your decisions have, whether intended or not. Of course, it’s not always possible as a founder to make decisions that completely delight investors, but it is possible to make decisions that keep faith with and retain the trust they have in you, by being authentic and acting with integrity at all times.

Being authentic means that the gap between who you are and who you portray to be as close as zero as possible. In other words, being authentic means bringing the ‘real you’ wherever you go, in every situation and conversation. You can look at it from a moral angle, but I’m particularly interested in making a business case for being authentic.

Let’s start with what happens when you are not authentic. You will start with creating an image of yourself that is different from who you really are. It takes an effort to do that. Now, you will have to act out that image and make everyone believe that what you act out is who you really are. It takes even more effort to fulfil that. Once you act this out, you need to remember this image because you need to behave consistently with your image with all the people that have seen you portraying that image. That seems like a burden that you have chosen to carry to me. That you are interacting daily on a superficial level is odd, as betraying trust means betraying yourself.

Thinking about authenticity made me aware of my own conversations I’d been involved in as an angel investor, and recall the awkward situations where I considered my trust had been abused. Trust in humanity will only continue if we cultivate authenticity and sincerity in face to face conversation, and once these behaviours have lapsed, trust is broken and I’m done with that relationship.

Authentic’ is derived from the Greek authentikós, which means ‘original’, but just being original doesn’t mean you will be perceived as authentic. You could be an original phoney. At its heart, authenticity is about practicing your underlying principles and values – being totally clear about who you are, your purpose and what you stand for. When your rhetoric gets out of sync with your values, you lose your integrity and future persuasiveness suffers.

So I’ve used trust as a key part in assessing my appetite to work with startup founders, and my experience is that it is a hallmark of high-performing startups – employees are more productive, more satisfied with their jobs, put in greater discretionary effort, are less likely to leave, and are healthier than those working in low-trust ventures. Startups that build trust among their customers are rewarded with greater loyalty and higher sales, and negotiators who build trust with each other are more likely to find value-creating deals.

I’ve developed an approach to assess the trustworthiness of founders on five dimensions: competence, motives, means, impact and sincerity. I’ve found that founders who demonstrate these five dimensions can deepen the trust others place in them and foster stronger relationships. Conversely, founders who don’t pay attention to them can easily behave in ways that undermine trust, often without even realising it.

For me, motives and sincerity are the essential qualities I look for, they make up the moral or ethical domain of trust, the areas where I judge founders on the choices they make, whether it’s whose interests they serve (motives), how they go about achieving their goals (means), or whether they own all the effects they have on others (impact).

By understanding the behaviours that underlie trust, startup founders are better able to elevate the level of trust that investors feel toward them, and for me this can be captured into the following three elements:

Positive relationship trust is in part based on the extent to which a founder is able to create a positive relationship with investors. To instil trust a founder must:

  • Be empathetic to the concerns of investors
  • Be open minded and listen to advice
  • Respond to feedback in a constructive way

Good judgement the extent to which a founder is able to show balanced judgement, shrewdness and perceptiveness gives an investor confidence. This means:

  • They show balanced judgement when making decisions
  • Creating conviction when expressing their ideas and opinions
  • Can anticipate and respond quickly to problems, offering solutions

Consistency The final element of trust is the extent to which founders walk their talk and do what they say they will do. Investors rate and respect a startup leader highly if they:

  • Are a role model and set a good example at all times
  • Follow through on their commitments and keep promises.
  • Act in the best interests of everyone, not just themselves

Watching the current political discourse (and deadlock and chaos), I experience a longing for an authentic discussion of the core values that ought to be guiding us as a society. I feel that we are morally adrift, that we do not have a clear sense of how to ground our identities and actions to ultimate values that transcend time and place.

That is not to say that our society is largely immoral. Just amoral, lacking a clear compass or foundational guide at a critical time. Instead of a moral compass, people are constructing their own moral decisions. They don’t seem to know where they belong. They don’t seem to know that they are doing the right things with their lives. They don’t seem to know what the right things are.

And that’s a parallel to startup culture, where founders pursue their own unilateral agenda, failing to ground their perspective in a moral perspective and the legal and ethical commitment they made to angel investors who gave them their first chance. I’m seeing founders following a loose, poorly defined moral individualism that, for many, bleeds into an extreme moral relativism.

The emerging reflections on right and wrong generally reflect weak thinking and provide a fragile basis upon which to build robust businesses. Moreover, founders behaving like this do not rely on any moral traditions or philosophical ethics to make decisions. Instead, the basic position is for each individual to make up their own rules and do what is good for them.

Ultimately, it comes down to personal integrity, the state of being honest, and respecting trust given. The golden rule: don’t do anything that you wouldn’t want someone to do to you. Doesn’t mean it’s wrong or right, that is determined by each person, their experience, their perspective. And of course, we have laws. They pretty much cover it.

I believe that in healthy humans there is an inner compass that guides right from wrong. It may get modified through various lenses of philosophy, religion, and culture, but I think integrity and not causing harm by breaking trust are pretty universal. Unfortunately, it is also possible to get estranged from that compass, the influence of others, circumstances and opportunity may divert us from the path we know to be right.

For founders, it can be hard not to diverge from the path guided and shaped by trustworthiness with their early stage investors if they can see a quick personal gain. However, look in the mirror, and can you reconcile breaking the trust given to you? For certain, it is good to stay in balance and in touch with being a founder your investors trust, as much as you can.

For me, I am never one to patiently pick up broken fragments and glue them together again, and tell myself that the mended whole is as good as new. What is broken is broken, and I’d rather remember it as it was at its best than mend it, and see the broken pieces to remind me that you broke my trust.

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