How to find if a startup investor is evil or a felon? Bringing in an investor to your startup is much like getting married. It may be even more important than that. You are locking into each other for what could be 10 or more years. You may even end up giving them substantial control over your company in the process.
Picking the wrong investor can crush all of your hopes and dreams and burn your hard work. It could mean your company ends up victimizing those you set out to help. Or that you are fired from your own company.
While entrepreneurs are often made to feel like it is they who have to prove that they are worthy of investing in, founders should be doing as much due diligence and vetting of those they are considering allowing into their business.
In this article, we will take a look at ten things that you should be asking, considering, and evaluating, so that you avoid the bad apples, and land the best investors for your startup business.
The Ultimate Guide To Pitch Decks
1. Conduct background checks
It’s relatively easy to conduct a background check on anyone today. Dig deep on Google and other search engines to uncover any digital dirt being buried on the company itself, as well as the individual partner of the investment firm you are working with.
Criminal arrests are usually easy to find. Though remember that arrests don’t necessarily mean that person was convicted or guilty of a crime.
Check online reviews. Such as on Yelp and BBB.org. Though again, note that these review sites are infamous for being manipulated as well.
What’s more important is how they’ve responded to complaints.
You can also check out the SEC website. One of the best ways to see if a startup investor is evil or a felon is to check out the SEC website, which is located at sec.gov.
When you go to this website, you’ll see a search bar at the top of the page. Type in either one of two things: “Startup” or “Investor.” Then click on “Search.” You should get results that include companies that are up and coming and also have people who are investing in them. You can look through these results by clicking on any of them that look interesting.
If there is an investor listed on one of these pages, click on their name and then click on “Profile.” This will show you what kind of background information is available about this person, including whether or not they’ve been convicted of any crimes, or if their firms are involved in any litigation. See How I Can Help You With Your Fundraising Efforts
You can also use background check websites, hire private investigators, and more.
See How I Can Help You With Your Fundraising Efforts
2. Do your investors believe in you?
Do your prospective investors believe in you as a founding team, not just the product, problem, or potential of the company?
Often investors will back a team they believe in, even if they don’t believe in the idea. They hope that team will go on to find a way to deliver returns on their money, even through pivots, or spinning off a new company.
In contrast, if they are only interested in the company, they may replace you, and fire you from your own business. That’s the last thing you want to happen.
When raising funds for your startup, you must take the time to vet them carefully. Check out this video where I have explained in detail what questions entrepreneurs should ask investors. The answers will help you make the decision if they are a perfect fit for your company.
3. Do they share your vision?
You also need them to believe in your vision. Ideally, for the future of the company, and in the way, it will be run, and the goals achieved.
It is the main factor that will indicate that they will stick with you for the long haul, and when things get tough (because they will).
If they don’t believe in the mission and vision, and this is purely a financial transaction for them, chances are they will pressure you into decisions that sacrifice your values and mission.
Not only may this cut your dream short, but also negatively impact your own reputation when you try to start another company and raise money again.
Look at what other companies they’ve invested in, and ask for their thesis about this investment as indicators of what they are thinking. The information could help you ascertain if a startup investor is evil or a felon.
4. Talk to other founders they’ve invested in
One of the best tells as to how investors really are is to speak with other founders that they have invested in the past.
Find out how things went after the initial investment. Did they continue to support them, participate in follow-up rounds, make introductions to other investors, and bring a lot of extra value, even in challenging times? Or did they leave them hanging, force them into poor decisions, and become a detractor from their success?
Talk to a variety of founders, who can tell both the good and the bad. Including how the due diligence process went after signing the term sheet. Did they change the terms and renegotiate? Did they make it hard to raise follow-up rounds, or block M&A deals?
5. Investigate their track record
How have the startups they have invested in fared so far?
How many have failed and shut down or been liquidated? How many were sold off early for investors to cash out, with the founders seeing little in the way of impact or compensation? How many were just milked as financial gambles at the expense of the mission and customers?
Contrast that with how many have had great exits, have strong positive reputations, are considered great places to work, and are thriving and profitable.
6. Check the fine print
A lot of newer entrepreneurs get hung up on the valuation when receiving funding offers. The terms can be even more important.
Be sure to check all of the clauses and fine print. Does it seem to be equally balanced between the interests of the startup and the investor? Or is it overly weighted in favor of the investor, at the cost of the company and founders?
Factors to consider can include board seats and members, drag-along rights, creation of employee option pools, and length and depth of due diligence. Keeping them in mind will help you evaluate if a startup investor is evil or a felon.
7. Quantity Versus Quality
What do your early conversations and meetings with these investors suggest that they are most focused on?
Sure, growth is good; they are responsible for analyzing risk and generating positive returns. Though, are they too focused on growth at all costs? Potentially at the expense of your product and customers? Or are they interested in building a sustainable business that can go the distance based on a legitimate business, not just hype, and endless fundraising or a questionable exit?
8. Take your time to get to know them
The most successful startup entrepreneurs take their time to get to know their potential investors. This is done well in advance of their need to start actively fundraising.
It is not uncommon for them to be building and developing these relationships months and years ahead of their next round.
It is easy for anyone to fool you for a little while. It is much harder over a period of months and years. Most people see the risk of marrying someone they just met online or have only been dating for a month. The same principle and risk certainly apply here, and with your co-founders as well.
Try meeting and conversing in a variety of settings over time. It may be grabbing coffee, getting the families together for dinner, lunch with their partners and your cofounders, hitting a sporting event, or something else. They will unveil their true selves over time.
This gives you time to establish trust, show your ability to execute, and become a more attractive target for their capital as well.
Determine if this is not only someone who is very capable and experienced, and is able to bring value, but who you trust and like to spend time with as well.
9. Speak to previous employers and employees
Speak to previous employers of the individuals you are working with, as well as their previous employees, and employees of the investment firm.
They may be bound by confidentiality agreements in some cases and limited in what they can say, but they can certainly give you a good idea of what this person and fund are about.
In a few words, they can provide a good feel of whether they are ethical and have good intentions, or are just sharks.
You can find these people, or augment these conversations by searching platforms like LinkedIn and Glassdoor.
Good indicators will include strong reviews of the company and its leadership on Glassdoor. As well as recommendations on LinkedIn.
10. Consult fundraising advisors
Fundraising advisors are engaged in this market every day.
They are in tune with the investment players and founders of many startups. They not only know who is funding, and who may be a logical financial fit for your venture, but who will make reliable and valuable partners for the long term as well.
They hear all of the horror stories from other entrepreneurs at different stages of the journey, as well as the praises. They have great insights into the world of startup capital from behind the scenes that you just won’t get as a founder.
These advisors can be key allies in navigating this part of the process, as well as for gaining warm introductions to the investors you really want on your cap table. Their extensive experience will help you detect if a startup investor is evil or a felon.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Conducting your own due diligence and vetting potential investors is a crucial and pivotal part of the fundraising game.
You should be doing more screening of them than they do of you.
It is easy for criminals to ace a good first impression. Be cautious. This is a big deal and a long-term relationship. It will make all the difference in your success, results, and long-term reputation.
Put these tips in action to screen your potential investors, find the best fits, and avoid those that can destroy your startup and everything you’ve set out to build. Make sure to check if a startup investor is evil or a felon before accepting their funds.
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