Beware the bad investor

Investor business
This entry is part 7 of 11 in the series Closing the deal
Reading Time: 4 minutes

Warren BergenIn an ideal scenario, your deal has attracted such interest that you have the luxury of choosing your investor. Most entrepreneurs are not afforded this luxury and will often need to take the investment dollar that is offered.

This I understand. Raising money for emerging companies can be incredibly difficult so, when money is offered, turning it away is not usually anybody’s first reaction. The point here is to direct your search so that when cash is offered, it is then likely to be from an intended source.

Examine your company and skills sets within. It can often ease the process of raising capital when you’re making the request of people who have been successful in the same sector. Not only would those people be able to fund or partially fund the company, but they might be an incredible wealth of information and assistance.

In a neat and tidy scenario, the sector-relevant investor is so enamoured with the deal he agrees to fund the company and signs on as a board member. But most times, we don’t get that neat and tidy is an illusion.

Playing the game of business to win
By David Fuller
How to know if your startup actually offers what the market wants
By Teruel Carrasco
Exuding charisma takes practice
By Carol Kinsey Goman
More advice on running your business
Read our series on Closing the Deal
Startup 101

Ask the investor about previous deals in which they have been involved. Ask about the successes and the failures. Take note of how the investor reacted to situations when things weren’t going well in a deal. Did he become a sideline critic or did he roll up the shirtsleeves and help out?

Building a company is one of the riskiest ventures on earth, so try to make sure you surround yourself with positive, experienced, helpful people. Ask for references from other entrepreneurs with whom they have invested. If they have not invested previously, ask for references just as you would if you were considering hiring them for a role in the company. You spend more time at work than you will with your spouse, so choose all people carefully. Yes, bad investors are out there. I’m sure you are not shocked.

Here are a few warning signals:

Timmy Two-Face: This individual starts off by posing as an investor. They then morph into, ‘I’ll consider investing if you hire me to complete this (fill in the blank) for you.’ This ‘investor’ will likely never invest a nickel. The most you will get is work in trade for stock in the company. He is essentially a consultant seeking gigs from entrepreneurs. Worse still, they are usually poor quality consultants. Consultants of quality have no reason to veil their trade.

Time Burglar Trish: This individual can’t say no and never says yes. Trish likes to be seen as active in the space of early-stage investing and likes to hang out at industry events. As a result, an endless request for information will ensue, followed by ‘Let’s wait until (X) happens.’ After sufficient rapport and exchange of information, simply ask the question straight out. ‘With whom have you previously invested?’ Their answer will give you your course of action.

Vulture Vic: A perennial favourite. This person will take you and your company for a ride. Often, offers are made with a massive array of punitive terms and conditions that will often end up with this investor in control of the company. A very good securities lawyer should help you avoid a bad situation here. A favourite trick of these guys is to propose a convertible debt instrument that comes with massive payments. These instruments are not bad in themselves, but they can be perilous when administered by those with evil intent. Payments are usually high enough to make sure the entrepreneur will not be able to keep up with them. Entrepreneurs sometimes accept these deals for three reasons i) no one else is offering them any cash, ii) they are so optimistic about the company’s future that they are sure they can make those payments, or iii) they just didn’t know about this practice. Upon default, the company usually ends up in the hands of Vic.

Larry Litigious: Your due diligence should discover how much time this guy spends in court. A guy who likes to use lawyers as his mode of leverage is best left aside.

Now a few words about the good ones.

There are a lot of good ones. Most people are inherently good, and if the entrepreneur and the investor have worked through various scenarios of success and hardship right at the start, they will have already worked through the various points of disaster that befall many other relationships. A well-thought-out shareholders agreement is the ruling body in this relationship.

A good investor likely has some use to you other than money. They have money because they did something right, but just because they built a company and have money doesn’t necessarily make them good investors.

You can learn from the good ones. If you’re lucky, they are familiar with your industry and can teach you something or open doors to the right people. Perhaps this investor has suffered failures in the past and can keep you from making the same mistakes he made. The mentor capital that came with that venture capital is often more valuable than the cash itself.

Warren Bergen is President of Alberta-based AVAC Ltd. and author of Swagger & Sweat, A Start-up Capital Boot Camp

Warren is a Troy Media Thought Leader. For interview requests, click here.

The views, opinions and positions expressed by columnists and contributors are the authors’ alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

© Troy Media
Troy Media is an editorial content provider to media outlets and its own hosted community news outlets across Canada.

Series Navigation<< Getting an investor to move from “not now” to “yes”All venture capitalists are not created equal >>

By Warren Bergen

Warren Bergen is President of Alberta-based AVAC Ltd.

Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.