From the outside, one might think that venture investors know about all of the important developments at their companies before those developments are made public.
Very often, this is the case. For example, when you’re the largest investor in the company’s most recent funding round, you know about most of the company’s financials and key metrics, the important product features that the company is working on, and the important hires that it’s looking to make. It also helps if the entrepreneur believes that you’re likely to invest in their next round as this gives them a greater incentive to share this information with you.
However, if you’re a smaller investor in a specific round, or if you were the largest investor in an earlier round but new rounds have taken place such that the new investors have a greater financial stake and rights in the company, and the entrepreneur believes that you’re unlikely to lead a future funding round, you may no longer know about what’s going on at the company before the public does.
As an investor, this takes a while to internalize. After all, even if you invested just a small amount in a company in an earlier round, you could readily make the case that you expect to know about what’s going on at the company in near real-time because of the impact that these developments will have on the value of your investment. However, that’s not how things work.
If an investor doesn’t have information rights (which are usually round-specific and go only to major investors), an entrepreneur running a private company isn’t obliged to share information with that investor. And even if the investor does have information rights, there’s a wide range in the extent to which entrepreneurs actually share information.
Given that that’s how things are, you need to operate with that reality in mind. Whenever you’re making an investment, you need to foresee that there may come a time when you don’t know what’s going on at the company any more than the public does.
And that’s why an entrepreneur’s ethics and judgment are so important. If the time comes when you don’t know what’s going on at the company, are you still going to be comfortable that the entrepreneur is acting ethically and making good decisions? Or are you going to have trouble sleeping at night?
Answering that question before making an investment makes you a better investor.
Also published on Medium.