A while ago I was speaking at the iNOVUSS tech event in Riga. After my presentation, I did an interview with one of the organizers. During the interview, I was asked a question that I was not prepared for: Which is Harder: Being an investor or being a founder?
The question intrigued me, and the more I have spent time thinking of it, the more it makes sense to me to write an article about it, as elaborating the question highlights the differences between investors and founders when building a startup. Thus, it this article we take a dive into the question: Is it harder to be an investor or a founder? And why?
How Close is the Startup?
For a founder, building a startup is a huge undertaking, typically the biggest thing in life after the family. The founder puts not only work but also passion and energy into the startup. A founder lives through all the ups and downs of the company. For a founder, the teammates are more than colleagues, they are part of the family.
For an investor it is different: An investor invests money into the startup and often helps in an advisory role. But investors rarely invest in only one startup; instead, a smart investor diversifies the portfolio and invests in several companies. Thus, while all of the startups are important to the investor, the investor is never as close to the startup as the founder is. Also, while the investor might support the company in an advisory role, the investor is not involved in the company on a daily basis and, thus, is not as closely involved with the company or its people.
As a result, the founder is always closer to the startup than an investor. And therefore, both the ups and downs of the startup are more personal to the founder.
The founder’s role is critical in building the success of the startup. Without a successful founder, it is impossible to build a successful startup. And while I would like to think that a good investor can help the startup and have a big impact on the growth, the role of the investor is mainly enabling (through funding) and supporting (through advising).
Thus, for the success of the startup, the role of the founder is a more critical one.
In Case of a Failure
In my view, the biggest difference in the challenges the founders and investors are facing comes in the time of failure. The founder is the one who needs to bear the responsibility of the failure. In addition, the founder is the one responsible for cutting the costs and firing people. And in case of a liquidation, it is the dream of the founder that turns into ashes.
For the investor, a failure means lost investment. And while no investor wants to lose money, everybody knows that it is part of the game: Every time an investor makes an investment into a startup, the investor knows that there is a strong likelihood that the investment will be lost. But despite the losses, the overall portfolio is expected to turn a profit.
It should be noted that not all investors are the same and it might be more difficult to be one kind of investor compared to another. The angels invest their own money and are responsible only for themselves, whereas the VCs are investing other people’s money and are therefore responsible for their own investors, i.e. the limited partners. The limited partners are expecting the VCs to provide returns for their investment. And as being a professional VC requires one to raise new funds in the future, providing results is required for the VCs of being able to continue their business. Thus, they have more pressure to show results - on a portfolio level - than angel investors.
Overall, the founders’ role is greater in a startup than the investors’ role. The founder is responsible for success, while the investor’s role is more enabling and supportive. Also, the founder has closer ties with the company as well as the team members. And if things go bad, it is the founder who needs to make the most difficult decisions and in the worst scenario see life's work gone with the wind.
Considering all of this, it is definitely more difficult to be a founder than to be an investor.
So my hat is off for all of you founders out there: You have the extraordinary courage needed in building new ventures making future a better place!