At some stage of their development, all great companies face the challenge of collecting the actual monetary resources needed to build something of value. Since most startups right out of the gate lack the means to borrow serious money, these resources are typically going to come from equity investors (people who give you money in exchange for stock ownership in your company).
Finding equity investors is hard. Finding great equity investors is really hard. It's a subject we will return to, but before we spend time on finding great investors, let's make sure we don't commit an immediate foot-fault by getting mixed up with a really bad investor.
Avoiding Crappy Investors Takes Knowledge and Discipline
Many entrepreneurs go into fundraising with the wrong attitude. They approach it like an insecure person would approach dating: hoping and praying they can find somebody, anybody, who will go out with them. If you are a solid entrepreneur, and your idea is decent, you need to gather your confidence, be brave, and attack the investor search with an attitude of not settling. It is important to select an investor who is not only right, but hopefully great for your company. This requires taking the long view. Recognize that being selective might take a little more time, but oftentimes securing fast money from low quality investors is significantly worse than taking your time to secure money from quality investors.
Ironically, by being more selective, you can actually be more effective at fundraising. If you understand what you need and why you need it and pursue that aggressively, investors will sense your clarity and recognize that you are being selective for a reason. This speaks volumes about the desirability of working with you.
Finding quality investors will require kissing a few frogs. Although most angels (and other early stage investors) are well-meaning and genuinely want to help you and give back to their community, it boils down to fit. This kind of investing is not easy, and can be thankless, so these are generally good people who are in it for the right reasons. Thankfully, really bad apples are incredibly rare. But not all investors are created equal.
How do you spot the clunkers?? You need to understand and recognize the troublesome behaviors. Bad investors commit three categories of sin:
1. Mild Sins, representing mere opportunity cost
2. Major Sins which hinder your business
3. Fatal Sins which do you actual damage
The mild sins are just a bummer; no major harm. You could have done better so you've lost an opportunity for greatness. These angels provide low-value add and translate into deadwood. The mild sins include:
1. insisting on a board seat but having no value to add
2. failing to actively support and "talk up" your company
3. sharing the upside in your company and giving nothing back in return
4. being in it for the wrong reasons (bragging rights)
5. insisting on you allowing his/her buddies into the round when they also don't add value
6. pestering you about exits, but doing nothing to help
7. failing to understand or keep current with the company's technology or positioning in order to represent the company well
8. not being able or willing to introduce you to other investors or customers
9. lacking business fundamentals or experience with sales
10. having no network or connections or networking skills to help you build the team
11. being a "gig-shopper" who is really just looking to join the team or find a job
The major sins are much more serious. They actually hinder your business. You need to recognize these instantly and make sure they are addressed completely before working with these angels. Key examples include:
12. taking a lot of your time and requiring a lot of hand-holding
13. being unpleasant, close-minded, inflexible and generally difficult to get along with
14. lacking knowledge of how to structure a round
15. lacking knowledge of how to stage capital into a company
16. being unable to make up their mind on whether to invest (or what strategic course to take) and always wanting another meeting
17. insisting on dilutive advisory shares or consulting fees for no, or dubious, value
18. failing to respond in a timely manner to requests for routine shareholder signatures or paperwork
The fatal sins are non-starters. These will do your business actual damage, and they cannot be tolerated. You have to identify them so that you can completely avoid working with these people. These sins include:
19. giving you bad advice and insisting you follow it
20. being on a totally different page in terms of exit strategy
21. lacking, honesty, honor, integrity and good common sense values
22. being bigoted, sexist or likely to harass or disrupt members of your team
23. spilling your confidential information or being a gossip
24. having and failing to disclose any sort of conflict of interest
25. creating major signaling risk through a high-profile failure to invest in the follow-on round even though the company has achieved its milestones
Clearly there are many ways things can go wrong or right when selecting angels. Your mindset needs to be focused on assembling a dream team. You are going to spend a long time together, experience many highs and lows, and a lot of stress along the way so make sure they fit your needs and personality. Being choosey requires courage and perspective. It also takes time and diligence to do the work, check references, and to be thoughtful in your decision. If you say yes to the first date who asks to go to the prom you're taking a big risk. You might still get by, but you've potentially made it much harder on yourself than you needed to.