Offering investors their money back

I was recently speaking with the founder of one of our seed stage startups. The company has yet to launch its product, but we invested in the company pre-product because we know and like the founder, and we like the space he’s targeting.

The reason for our call was that the founder has decided to change the company’s business model. The company built a beta product based on the original business model, tested it out with customers, and didn’t get the positive customer feedback or traction it was looking for. Rather than continue investing in the same model, the founder decided to change the company’s model with the majority of the seed round funding still in the bank.

During our talk, the founder shared the reasons for the change, the details of the company’s new model, and how this new model naturally overcomes the problems inherent in the original one. The new model is much more ambitious than the original one, and I welcomed the change with excitement.

What happened next got me even more excited. The founder shared that since we had invested in the company based on the original model and since this model was changing, he’d be glad to return our money if we didn’t believe in the new model. This was important for two reasons.

First, it’s the right thing to do. We invested in his company when it was doing A, and now it’s going to do B. Although he had no legal obligation to do so, the founder placed himself in the shoes of his investors and decided that we may not want to be part of plan B. Since what we signed up for changed, he volunteered to return our capital if we requested it. Acting in this way in the absence of any legal obligation shows the integrity of the entrepreneur.

Second, this action shows the confidence which the entrepreneur has in what he’s doing. If he didn’t believe that he could raise funding for the new model, he likely wouldn’t have offered to return the capital of existing investors. An unshakable conviction in what you’re doing is the signal of a great entrepreneur.

In addition to these two signals, we were also more excited about plan B than plan A. So we decided to move forward with our investment intact.

However, even if we believed in plan B less than plan A, we would have still not asked for our money back. Business models change much more easily than people. I believe that an entrepreneur with integrity and conviction will eventually find the right model.