How to Navigate Founder-Venture Capital Conflict Resolution: Strategies for Success

With the frenetic pace of life in venture capital and startups,  Founder venture capital conflicts are a reality that cannot be avoided. A Harvard Business Review study indicates that 70% of startups collapse due to internal issues, not external market conditions, with founder-venture capital conflicts being a prime mover among them. Founder-venture capital conflicts can critically affect the growth of a startup as well as returns on investment, so it is important to decipher and fix them. Following are founder-venture capital conflict resolution strategies, together with some information on how Evolve Venture Capital can be of help.

The Collapse of start a business Genius

The experience of entrepreneurship Genius is a living illustration. The founders of this technology firm had a visionary product idea and obtained heavy venture capital backing. But as the business expanded, conflicts between the founders and venture capitalists developed. The founders envisioned product innovation and long-term growth, whereas the venture capitalists wanted quick market growth and short-term returns. The dispute spiraled out of control, causing the departure of the founding lead, the exodus of the company's key talent, and eventually the demise of the startup. The issue dramatizes the imperative need to settle founder-venture capital disputes.

Common Triggers of Founder-Venture Capital Conflicts

Diverging Strategic Visions: Founders tend to be product- or service-oriented and desire to create a unique brand in the marketplace. Venture capitalists, on the other hand, view the marketplace as a whole and the investment return and can push the company toward more rapid expansion. These different visions can clash with the course of the company.

Equity Distribution and Control Issues: During rounds of financing, there usually are controversies over equity shares and decision-making powers. Founders may feel that their inputs are not appreciated, but venture capitalists would demand more control to ensure protection of their investments.

Performance Expectations and Pressure: Venture capitalists typically have high performance expectations from start-ups in order to achieve high returns on investment. But sometimes founders may be unable to meet these expectations with uncertainty of the market or operational disruptions, leading to differences in the assessment of performance and stress.

Understanding the Root Causes of Conflicts

Information Asymmetry: Founders have an extensive understanding of the startup's technology, products and market, but venture capitalists have a lot of external sources they rely on to gather and evaluate information, as well to gauge the founders reports. Because of the differences in the depth of knowledge of the industry, the information disparity can result in differences of opinion on the company's expectation of success, leading to conflicts. 

Differing Incentive Mechanisms:Founders have much of their reward tied to the long-term success of a company (equity appreciation, their own established importance, etc.). On the other side, while venture capitalists are seeking a long-term strategy to accomplish their financial returns, they are doing so through planned short-time efficacious means to exit through an IPO or an acquisition. When the events cause misalignment of incentives there are the likely conditions of conflicting decisions by the founders and venture capitalists.

Communication and Trust Issues: The pressure-cooker atmosphere of startups can put too much stress on relationships between founders and venture capitalists. Lack of trust and poor communication often fan the flames of misunderstandings and conflict.

Effective Conflict Resolution Strategies

Establish Open Communication Channels: Regular meetings and transparent information sharing can help both parties remain well informed about the company's state and issues. This will help reduce information asymmetry. The founders, for example, can provide the venture capitalists comprehensive monthly or quarterly financial statements, update reports from key projects, and market trends. The venture capitalists can provide the founders information about their own perceived market knowledge and expectations to improve their collective understanding.

Align Interests Through Incentive Mechanisms: By designing realistic incentive structures, venture capitalists and founders can get their conversations and objectives in check. For instance, contingent-based compensation could be the right idea for founders depending on the performance metrics on the basis of the long-term goals of the company. Provide equity or profit shares to venture capitalists so that they get aligned with the start-up when it grows in the long run.

Seek Third-Party Mediation: When disputes escalate, and open resolution is no longer possible, perhaps the use of a neutral third party to mediate is the best option. Mediators can assist with diagnosing the reason(s) for disputes, improve information flow, and offer unbiased approaches moving forward for impartial resolution. For example, King Stubb & Kasiva provide a full suite of services for entrepreneurs about start-up ecosystems, including conflict resolution services. Given Evolve Venture Capital's extensive experience in this area, we could extend efforts to solidify support for professional mediation.

Develop a Conflict Resolution Plan: Proactive planning is critical for addressing conflicts. Founders and investors can create a conflict resolution plan before disputes arise, which would define the process and approach for dealing with disputes. This can articulate whether the parties will go through mediation, arbitration, or litigation and define the role and responsibilities for each party in the resolution process.

Build a Shared Vision and Values: Periodic dialogue around the mission and values of the venture will assist in bringing the entrepreneur and investor in alignment. When discussing shared interests—developing valued products, or capturing market share in order to build a sustainable company, the entrepreneur and investor may begin to concentrate on collaboration rather than conflict. For example, the entrepreneur and investor can hold quarterly retreats and collectively discuss the vision and values of their company. Focused discussions such as these create greater mutual awareness and understanding.

How Evolve Venture Capital Can Help

As an established venture capital firm, Evolve Venture Capital provides comprehensive support to resolve issues about founder-venture capital conflict. Evolve Venture Capital first provides a rigorous due diligence process to fully understand the potential of and risks associated with startups so as to align founders and investors from the beginning. The due diligence also examines the founder's ability, integrity, and vision. This is part of the process of laying a solid foundation for working together.

For example, the due diligence is accomplished prior to investing when Evolve Venture Capital examines the business model, the market opportunity - but also the founder and their ability, integrity and vision - ensuring that they can work together after the investment is done.

Evolve Venture Capital also provides, after investment, more structured and informal mentorship to help founders post-investment. Drawing from extensive experience Evolve Venture Capital provides founders with support with their planning for the business, operations management and team building to ensure the founders are successful and their startups can grow sustainably and weather challenges as they arise. For instance, Evolve Venture Capital's mentorship programs bring industry experts and successful entrepreneurs together with founders where they can obtain insights and practical advice - helping them to make a decision - easefully and less conflict with investors.

Evolve Venture Capital also values communication and collaboration between founders and their investors, and supports their advisory supply chain. Evolve Venture Capital creates regular communication channels (and reporting) to ensure timely sharing of information and that both parties have a fair understanding. Evolve Venture Capital holds investor -founders meet ups and seminars to provide more opportunities for face-to-face collaboration, networking and relationship development for trust. When disputes arise as they sometimes will, Evolve Venture Capital will act as intermediary and help facilitate a resolution between the parties (based on their expertise and vested neutrality). Evolve Venture Capital is also able to leverage its worldwide network of resources to provide founders with considerable support. Whether it is wanting to connect a start-up to industry partners, suppliers, or customers or providing legal, financial, and technical advice, Evolve Venture Capital helps founders work through challenges and in turn grow faster - which may increase the potential to align the interests of the founders and investors and enhance settlement opportunities.

Founders and venture capitalists will always experience conflicts, and this is not uncommon in the startup and venture capital ecosystem. However, by identifying root causes of conflict and taking the necessary steps in resolving them, founders and venture capitalists can find a path forward to resolving various conflicts in ways that lead to opportunities for growth. Evolve Venture Capital is committed to connecting founders and investors. Whether founders are seeking capital or investors are seeking returns, Evolve connects these stakeholders with funding, crystal clear advice, and strategic support. Ultimately, founders convert their ideas into realities and investors reap spectacular returns! While they pursue support or returns, they will inevitably encounter founder-venture capital conflicts - this is where Evolve joins in the adventure!