In your hunt for potential investors, you’re bound to run into a few bad eggs. They easily stick out and we’ve all met them (and most of them don’t even know they suck–no one tells them).
You’ve also come across great investors. They’re responsive, helpful, and when they do “pass” you’re still excited to send them other opportunities. They ask that insightful question you’ve never heard before, even after 20 meetings. They close quickly and don’t try to extract ownership with unreasonable terms or “New York term sheets.”
What happens when it’s not that clear though? Most founders have a tough time sussing out who’s going to be good and bad while fundraising.
Remember, you’re the one who has to work with these people for years to come. I’ve heard too many stories of investor regret–total pains in the ass who aren’t as genuine as they originally seemed. The good news: If you’re paying attention, red flags will pop up.
Here’s what to look for:
Excessive information requests.
Obviously, investors have to look under the hood. But, most of the time, your business is not rocket science (I mean, unless it is–in which case, forget this one).
I can promise you that your business is easy to understand quickly. No matter what it is. If the investor is arguing with you about the formula you used in row 18, column six, sheet five to project your revenue in five years, walk away.
Unless you’re raising a growth round (where only numbers matter), don’t take early stage capital from investors who are more focused on the economic model than anything else. They have no idea what they are doing.
If they’re sending you very long and comprehensive request lists to get to a term sheet, walk away.
They ghost you.
The worst investors begin conversations with you–meet with you a couple of times, spend time with your team, dig in, get you excited–and then poof, they’re gone. They are very unresponsive and you constantly have to follow up. They drop off the face of the Earth without even formally breaking up with you (it’s not me, it’s you, right?).
Or, they tell you the term sheet is coming. And coming. And coming. Don’t work with them. If you are chasing people, or if they act excited and waste your time without following up, move on (but don’t forget to tell other founders to stay away).
There’s no sense of urgency.
Similarly, steer clear of investors with no formal process and that are impossible to tie down from the start. Do I want to come in and present in four months?
If they’re unresponsive or say they have too much going on for the next inconceivable amount of time but want you to wait, don’t. Take that at face value–cross them off your list (which is probably very long anyway).
Now, as the one exception to my rule, these investors aren’t always “bad”–just ones you shouldn’t work with now. Sometimes investors are in fact busy, or maybe they are a small team with limited resources that honestly can’t meet with you until March.
Remember that massive amounts of money are controlled by small groups of people deploying it. They get busy on IPOs and other deals for their portfolios and can’t control that. One fund has been on a firm retreat in Argentina every time we raised. The entire firm. We wanted them to invest, but c’est la vie.
They expect you to listen to them and aren’t listening to you.
Bad investors are distracted during your pitch and don’t pay attention to your message, but have countless opinions on how you need to run your business. Yes, I want an investor who makes me think–one who has a strong point of view, challenges me, and offers new perspective.
But when an investor has a lot of opinions about what you should be doing, when it’s clear they don’t really understand what you’re trying to do (i.e., they ask for comps repeatedly, like “so, this is the Yelp of private schools with a Glassdoor twist and you’re distributing it like Warby Parker?”), that is not a person you want in your court.
There’s no diversity.
If you’ve met a bulk of the team, hell, if you’ve met just three partners, and every single one fits the same profile (white dude in a blue blazer that lives in Greenwich), that’s not the place for you. Sometimes it seems like every investor is pumped out of a factory behind Wharton. That’s fine, they’re all great guys (which in of itself is a big problem), but find some people who have actually been on the playing field and built things as operators.