What Happens To The Founder Of A Company Backed By Angel Investors, If It Fails?

Last Saturday, I woke up early as usual and sat down to write. Checking my e-mails, I came across a weekly Quora summary, and a question that was interesting. The question was “What Happens To The Founder Of A Company Backed By Angel Investors, If It Fails?” I had some views on this, so I wrote this answer. Within a week, my answer had been viewed 200,000 times, upvoted 1.5k times, and republished on Forbes. Here it is in full:

Of my 20+ angel investments, three have failed so far. I have seen three completely different ways this has played out, and it’s proven to be a very valuable experience, especially as I have 30+ pretty damn awesome angel investors in my company, Ometria – UK E-Commerce Intelligence Startup Ometria Raises $1.5M Seed Round | TechCrunch

Case 1.

High-flying founder, not from a tech background, but with experience of managing large teams, with a strong profile, with great and relevant industry connections. Very charming, very easy with people, but also steely and able to command respect from the team. Invested a significant amount themselves into the company, then raised a seed round that I participated in. Three people on the board – two founders, one investor.

Investor relations consisted of updates not from the founder but from the investor on the board. The investors were invited to very swanky events, at very nice restaurants and clubs, and given very nice presents, and that was the opportunity to spend time with the founder and the team.

The market proved too competitive, the unit economics for the company didn’t work, and it ran out of cash without being able to raise the next round. The month or so before that happened, all communication to the investors was that everything was fine, there was money coming in, that the existing investors would all follow on. Suddenly one day an e-mail arrived that the company was in liquidation.

There was absolute total fallout. Investors threatened to sue. Angry e-mails came from everyone. The founder called me, actually crying, asking “why is everyone being like this? We made a board decision, a hard one, and I’ve just had to fire my whole team. It’s awful. I did everything I was supposed to by the law”. All the relationships were ruined. Nobody came out of it feeling good.

Case 2.

Two founders. Young, energetic, over-achievers. Was literally “sold” the investment through the founder reaching out over LinkedIn. Some amazing people were investing in the round (one of whom is now absolutely instrumental to Ometria) so the social proof was there. Plus I really got on with the founder – awesome guy. The company was in a “socially beneficial” space, which also made it easier to invest. Not much traction, but for investors who invest in people, as I do, it was definitely worth it.

The company didn’t go anywhere. The market didn’t materialise – the founders worked hard at it, but they didn’t have enough money to build a big strong team, and overstretched themselves. Huge amounts of intelligence was put into it, but without the resource, most of it wasn’t executed on fully. The company ran out of money, tried to raise, but there wasn’t an improvement in traction so it didn’t happen.

One founder (the one I didn’t know as well) had, it turned out, moved to a different country without anyone knowing about it. They’d been working remotely for months. As the money ran out, the founder I knew well sent an e-mail saying he was stepping down as CEO, handing that role, and his shares, over to the other founder, who would take a salary cut. The suggestion was that this would give them a further six months of runway, and maximise the chances for the company not to fold.

I’m still really good friends with the first founder, and we’re involved in each others’ businesses. He’s a great guy, and will do great things. But the investors were confused, more than anything. No one was angry as such, but it was clear that all faith in the company had been lost by the founders, but that was not the message that was portrayed. This step seemed an easy way for the CEO to get away from the inevitable mess of liquidation, and a way for the other founder to give himself some more time to work out what to do next. There was no major fallout, but people just stopped caring, and were left somewhere between indifference and a loss of respect.

Case 3.

One founder. Smart, academic, had spent years building up a startup, pivoting around looking for a business model. University friend. Very small team. When he first approached me for investment, I said no as I didn’t feel that the product was ready. However very quickly a seed fund and a well-known incubator put money in, and I figured that their DD had been done properly, and given that I knew the founder already, it was a good investment opportunity.

The next year was spent trying to recruit people, trying to leverage all startup processes, from the Lean Canvass, to agile engineering, in order to get product-market fit, which the investors had originally assumed was already there. During the fundraise there were paying customers. Immediately afterwards they all left, the product turned out to be buggy, and the team turned out to be unable to fix it. By the time the next round came up, there was no further traction, and no chance of raising.

The founder raised the alarm early. He reached out explaining the runway remaining, explaining the issues that had happened with the product and the team, and asked each investor for input and advice. The advice he received was sometimes emotionally charged, but always constructive. In the end there was nothing that could be done.

He asked again, explaining that unless they were able to raise further investment, the company would have to close, and explaining that he had now spoken to all of the current investors and to others in the market, and it was clear that there were no opportunities to raise funding. This time he said the only step remaining was to sell the IP, and asked for relevant introductions.

All of these were followed up, and there were regular updates on progress. Some companies were interested, but the timeframe proved too short for any realistic firesale. In the end an e-mail arrived explaining that all companies had now responded, and that there was no option to sell the IP, so the only next step was appointing liquidators.

This was done, and the process was handled. Documents were signed by everyone including the investors, and the company was closed. The founder wrote a long e-mail to all of the investors, thanking them for being part of the journey, and providing a link to a blog post he had written, detailing all of the learnings he had taken away from the experience. It was an interesting, valuable, and genuine post that came from the heart. If he reads this, then perhaps he will share it in the comments below.

I wrote an e-mail back, copying in the entire investor group. This is it, word for word, “I genuinely wanted to tell you how well you have handled this process. You have kept everyone informed throughout, you have demonstrated both humility and the ability to learn and educate based on the experience, and you have not alienated anyone in what was clearly a tense and uncomfortable process. This is one of three investments that have not been successful for me, and you have been head and shoulders better than the other founders at handling it. I look forward to seeing what you do next.”

Almost every single one of the investors responded, backing what I said and reiterating their support for the founder. “Echo your thoughts entirely. Best of luck for your next venture!”. “I echo Ivan’s thoughts as well. Keep in touch and hopefully we will meet again.” “Here here! +1.” “Agreed – very professionally played.” ” I am confident you will be looking at running another startup and using those lessons learned to break through.”

I feel like I have absolutely no negative feelings towards that founder. If anything, I have gained respect for him. If he ever wants a reference, he will have it, and it will be a good one. Companies fail. He couldn’t make this one work. But he definitely tried his best, and he definitely handled his investors with absolute total integrity and respect. Yes we lost money, but given the way he handled it, none of us care. It was a risk we took.

It’s amazing how differently the three founders handled the process of failure, and how different the outcomes have been. There is such a clear lesson here. Treat all of the investors, minority or not, with total respect – always keep them informed, always ask for their opinion and input, and you will come out with even stronger relationships, even if your company fails.

Epilogue:

The founder of the third startup then left this comment at the bottom of the answer:

Thanks Ivan Mazour, kudos for sharing your experiences too! I’m the third founder, here’s our post mortem – 3.5 years and $700,000 worth of lessons learned. Hope it’ll help others to avoid some of our pitfalls 🙂

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