An entrepreneur who has made money for his or her investors is like catnip to VCs. The discussion is more about “any reason we shouldn’t back this deal?” than “any reason we should?”
But what about someone who has lost money for investors?
On balance, this is a positive, but it all depends on why he or she failed, and how they behaved during the process of failing.
Some excusable reasons:
- Market turned and unable to raise follow on capital
- Unexpected (unexpectable) market or platform change
- Idea was a smart calculated risk that didn’t pay off
- Entrepeneur didn’t know something important, that they have since learned and unlikely to repeat mistakes
In these events, I would view the experience of starting and failing to be akin to “getting an education on someone else’s dime.” I would favor this type of entrepreneur over someone coming from a corporate background or with no entrepreneurial experience.
However, if I felt their startup failed because they were arrogant, dumb, or unable to attract talented people to work with them, I would hold the failure against them.
Finally, it matters a lot how they treated their employees and investors in the process of failing. This is HUGE and not understood by most entrepeneurs. I will give you two examples:
- While my first startup is now a big success, we long ago had to merge with a direct competitor, which was a very difficult process. At the time, the company (separate or merged) was not obviously going to succeed. One key element of a merger like this is the question: what ownership will go to the founders vs. their investors? In many cases, the clear ownership lines that were previously drawn will have to be completely re-written to convert into a new class of stock. While many founders will view that the need to use their leverage here (you need the founder’s consent to get a deal done) to extract a good deal for themselves, I knew this would poison my reputation. I took a risk and said to my investors: “The founders believe this is the right deal, and we trust you to treat us fairly.” In the end, they did, and even if the company hadn’t later succeeded, I retained my reputation.
- Just an hour ago, a well networked angel referred me a deal that is very promising. His email had three sentences: the first two described the company’s business and traction. The third said: “The founders also brought along the investors and cap table from [before they pivoted], which speaks well of their ethics.” This is how important reputation is and how it follows you: the way you treated your seed investors in the idea that didn’t work is treated of equal importance in recommending you to a new investor with the traction of your new business.
If your company is failing, go out of the way to treat your investors with respect and integrity: salvaging a glowing recommendation is the most you are going to get from your experience at this point, more valuable than a little difference in cash or stock from the liquidation or fire sale.
Read Josh Hannah’s answer to “What Happens With a Startup CEO if The Company Fails?” on Quora.