The venture capital ecosystem is notoriously criticized for bad actors, of which there are many shapes and sizes to be cautious of. This blog post is an overview of the warning signs to look out for in order to ensure you don’t partner with a vulture capitalist when seeking funding for your startup. We also call out these poor behaviors in order to raise the bar for startup investors to a more admirable standard.
Not a Founder
You don’t know what it takes to build a company and support founders through the ups and downs unless you have been one. Be skeptical of lead investors that haven’t built their own startups.
Not a Decision-Maker
If you are talking to an investor and being jerked around with associates, principals, fake partners and other fancy words for “not a decision-maker”, move on. Investors should respect your time as a founder enough to spend their time with you.
It still astounds us that some investors think it’s fine to spend most of a meeting with founders looking at their phone or otherwise not paying attention. People put on their best face in intros, so don’t be surprised when the inattentive investor simply ignores you later.
How hard is it to reply to an email? Not very. If your prospective investor doesn’t get back in touch within a few days or whatever timeline you agreed on for follow-up, be wary.
If the potential investor repeatedly asks seemingly irrelevant questions or seems otherwise baffled by your business, how do you expect them to be a useful partner? You are interviewing the investor as much or more as the investor is interviewing you.
Inability to Decide
When the investor is overly hesitant in decision-making either individually or with a group of partners, you know what kind of partnership experience you can expect: waffling. This is a chronic issue in the startup investor world and you want backers of conviction.
Lack of Transparency
Investors should tell startups their process and the parts of the process that are variable from company to company so that founders can plan accordingly and manage expectations with other stakeholders.
Most investors are very busy so some lateness will happen, but it should be apologized for. No shows are shockingly common and totally unacceptable. Same for last moment rescheduling.
You should reference check investors, even the brand name ones. Ask to talk to founders of companies that haven’t been rocket ships so you understand how the investor will work with you when things haven’t gone well.
Investors attempt to secure leverage on you by reaching exclusivity and then changing terms on you. This is one of the most difficult things to walk away from, because it feels like such a big step to go back to the market — but do it! Investors who change terms on you after an agreement lack integrity and will be terrible partners.
Using Your Money
Here is one we hadn’t even thought of: investors asking startups to pay for a meal during the investment process. What’s up with that? Similarly, what century are we in where it’s ok for poor startups to be paying for the legal fees of cash-rich investors? Seriously?
Now all that sounds quite bleak, and frankly the average startup investor is at best not hurting their companies. So what should you look for in an investor as a useful long-term partner?
A great investor should add value to your business even in the diligence process. This can come in the form of intros to potential partners, identification of previously unknown risks, strategic insights on how to go to market, help creating a more detailed execution plan, or thoughtful questions that result in you having greater clarity about your objectives. Be sure to specifically ask potential investors for help with your biggest challenges during diligence and monitor whether they deliver any value.
The best investors are like coaches — they don’t have the answers for you but rather facilitate you uncovering the best answer for yourself. In interacting with a potential investor, imagine whether you would want their coaching and support independent of their capital. Long-lasting partnerships are not based first and foremost on money, but rather on respect, trust, service and valuable learnings.
Truly phenomenal investors are surrounded by communities of raving fan founders who love working with the investor and have heartfelt stories to share about how the investor went above and beyond in helping them. Attempt to attend a group event with multiple of the founders in the investor’s portfolio to get a feel for the culture of the companies and founders that the investor backs. The experience of other founders who have worked with an investor is the single most useful data point in evaluating that investor as a potential partner.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in seed-stage companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation and computing.