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Since the second coming of startups began a few years ago, I’ve visited dozens of countries, presented to thousands of founders in keynotes and workshops, and mentored a couple of hundred one-on-one. Early in a startup’s lifecycle the most pressing questions always seem to be around fund raising. Unfortunately, most of these conversations also come with a sense of desperation where the founders are ready to sell their soul to the devil just to see their dreams come true.
From the only kind of experience that truly matters, personal, I can tell you that not all money is created equal. Most first time founders may think that all they need is the cash. In reality, this early money dries up MUCH faster than one might expect and having wrong investors on board will provide zero value in stressful situations, will likely just delay your startup’s death, AND waste your non-refundable lifetime in the process. It is crucial to take on investors who can and will help with experienced advice, connections, and personal empathy as you go through this near impossible startup journey.
Take heed, here are the types of investors to avoid at all costs… even if it means abandoning your startup with no other financing alternatives. After all, you only live once and have a limited time to become successful.
Friends and family investing for the wrong reasons
After you put in your own blood, sweat, tears, time, and cash, people who know you best will be your first investors. They will seldom do it for any other reason than the fact that they believe in you and want to support you. That said, anyone that can write a check for a relatively substantial amount (that they are likely to never see again) is a person that knows how to make money and has made other types of investments before. That means that this person has probably invested in stocks, mutual funds, real estate, or has had a business or two of their own. They may even fancy themselves a sophisticated investor. Yet angel investing in startups is a completely different animal with an entirely different investment risk profile.
Here is what you need to be careful with when friends and family are investing in your startup:
3rd tier accelerators that provide no value
Accelerators are the new business school. They provide various levels of value much like the many choices of universities. At this point, it just may be more difficult for you to tell one from there other, especially if you don’t know what to look for.
Accelerators provide startups with mentorship, office space, a marketing push, and sometimes a bit of cash in exchange for a share of the company. The terms can vary wildly and the value an entrepreneur can extract can as well. While the likes of Y Combinator, TechStars, and 500 Startups are the Ivy League of accelerators, many are simply good at marketing themselves while providing little actual value.
Here is what you should think about when choosing the accelerator route:
Angels investing for the wrong reasons
Angel investors are usually been there, done that entrepreneurs who are investing both to make a return on their money and for other non-monetary reasons. Compared to other types of investments, investing in startups is very risky. This is why it is crucial for you to get to know your would-be angels and their reasons for investing before you take that check.
Here is what to look for:
Venture funds that only “co-invest”
Unlike angel investors, venture fund managers are professionals who invest other people’s money. They are trusted to do so because they have a particular insight and can attract a “deal flow” of high quality entrepreneurs and their startups. They should have a wealth of experience from serving as a member of the management or founding team of one or more successful startups or at the very least from years on the finance side of this particular investment asset class. They should most certainly be able to determine the profile of startups they are seeking to invest in and be able to make quick decisions.
If you encounter a venture fund that is only willing to co-invest in your startup, you should probably run in the other direction for the following reasons:
Stage, region, or focus inappropriate venture funds
Raising a round will take much longer than you anticipate. The money you raise will likely dry up much faster than you expect. Who you raise money from will influence the fundraising timing, value, and terms if your startup is doing well and can kill it entirely if you are not.
If you are able to get a “yes” from a well-known and trusted firm, take it even if the valuation is not exactly what you had in mind. If you are forced to move on to lesser-known and trusted firms, here are the land mines to avoid:
Creating a startup is a marathon, not a sprint. Think carefully and strategically about whom you choose to partner with and if the short-term trade-off of taking the wrong money is worth the deal with the devil you’ll have to repay.
Got an investor horror story? Please share in the comments and feel free to name names