Sharing information with operating investors

I was speaking with the founder of one of our startups recently. The company is performing well in an attractive market and is already well financed. However, additional funding would let us scale up our already profitable customer acquisition channels. This is why I was happy when an investor with experience in our space expressed interest in the company.

The caveat is that the investor also has an operating arm and their experience in the space gives them the ability to execute on the idea. If they’re approaching us with bad intent, they could be looking to learn about the details of our strategy and resulting metrics, and execute the strategy themselves if they find the metrics attractive enough. This was the concern raised by our founder.

I understand where our founder is coming from. He has been working very hard to build a business with tangible value over the last few years of his life. He doesn’t want to take the risk of someone sweeping in, building a competitor, and taking away his market leadership.

However, while I understand his perspective, I don’t agree with it. If you’ve been working on a business for several years and established it as a market leader, that means that you know what you’re doing. You’ve executed better than each of your competitors so far. If you think that this was simply because your competition was weak, you’re likely giving yourself too little credit.

And even if weak competition did contribute to your success, now you have a multi-year head start to any new competitor. Even if that new competitor does indeed execute better than you, as long as you keep doing what you’re doing they’re simply going to be playing catch up. Economies of scale are on your side so at your current scale, each incremental effort you put forth is going to generate a larger positive return than the same effort put forth by your competitor at their smaller scale.

For each of these reasons, I recommended our founder to share information with the investor. Even armed with the same information, the investor will not know the business as well as our founder. Truly knowing a business comes from having taken the daily actions that produced that information as output, not from reading about the information that others have produced. You need to truly know your business to become the market leader, and our founder has already shown this to be the case.