Don’t take money from strangers

Q: we thought we’d successfully raised investment from an overseas investor. The paperwork was signed, we sent over our bank account details, and then they went dark. Despite a lot of chasing, they just disappeared and we’re back to square one. Now I’m worried that we won’t be able to raise from other investors once they learned that this happened. What should we do?

The good news is: it shouldn’t matter. It shouldn’t have any bearing on your ability to raise a round from other investors. Be open about the fact that you thought you had a round squared away when the investor went dark and left you hanging — it’s not your fault. If anything, the fact that it progressed so far before it fell over helps indicate that you’re an investible startup.

There’s a lesson in this for all of us: not all investment capital is equal and investment can’t be measured in just dollars. How they can help you following their investment and whether they have a track record of doing the right thing for the companies in their portfolio is ultimately more important than the valuation you agree on. Value = dollars + valuation + speed of execution x (experience in your area + reputation within the industry + evidence of helping portfolio companies scale, solve problems, hire great people and tell great stories).

Just as they do their due diligence on you, you need to do your due diligence on each investor, especially on the lead investor.

Something about their board room just didn’t seem right, but I couldn’t quite put my finger on it..

You wouldn’t marry someone who bought you dinner on your first date. But from the day you sign the investor’s term sheet to the day they receive the proceeds of their investment in your startup, you are in a relationship as difficult to unwind as a marriage. You don’t have time to date for a year, so you should at least speak to some of the other people they’ve been in relationships with!

Once there’s an indication of interest (eg you’ve talked and they’ve invited you back for one more pitch to their board, their investment committee or a quorum of partners, and then they’ve offered you a term sheet), at that point ask them for an introduction to the CEOs of some of the other startups they’ve invested in. Talk to those people and ask them about how the relationship has gone.

It’s easy: don’t take money from strangers.