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How to find red flags in potential investors?

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Currently looking for additional investors and have been in talks with many different VCs - some awesome, and some clearly not a great fit. How can I find/notice red flags in potential investors? What red flags should I be most concerned about?


8 Replies

Melinda Wittstock
3
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Melinda Wittstock Entrepreneur • Advisor
Entrepreneur, tech+social data innovator, Verifeed CEO, Maverick 1000, award-winning content creator, marketer.
A couple of thoughts:

1. Make sure you are aligned on the vision or the big "why". (Another entrepreneur had a pre-Facebook social network turned into a cable set top box, get my drift?)

2. Know the type of people you want to invest, and then qualify them against that. (Remember it's like being married, and it's not all about the money).

3. Do they bring domain expertise? Again, stupid money doesn't much help.

4. Talk to other startups they've invested in. What are they like? What has the experience been?

5. Be aligned on the exit.

6. Have clear boundaries about how much involvement in the day-to-day you want (or don't want)

7. What is their attitude about valuations and terms?

I guess all that is a ... start! Good luck! Let me know how it goes,

Melinda
Robert Clegg
1
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Robert Clegg Entrepreneur • Advisor
Game Based Learning Expert
I'd love to hear everybody chime in here - How many of you have had this much choice in what investors you decide to go with? Who here has turned down $1M, a real deal, because you didn't feel a "fit".

I'll go first- I turned down a $1M deal years ago (1999) because it essentially removed me as CEO. Had I run a company before? No. Had I been part of a startup before? No. Was I outraged that investors wanted somebody more experienced to run the company? You betcha! I was green. Holding on to my "baby", my "idea".

Looking back I shoulda done the deal. I would have reached my experience level 5 years faster. And no, there were no other deals waiting in the wings. Was I savvy enough to create a bidding war? Did I find other willing sources? Did I know the power of timing? No.

Sometimes a bad fit is the only fit. What say you?
Melinda Wittstock
0
0
Melinda Wittstock Entrepreneur • Advisor
Entrepreneur, tech+social data innovator, Verifeed CEO, Maverick 1000, award-winning content creator, marketer.
Robert, I agree but you should go into that decision with your eyes open. That's all. It never hurts either to ask questions and do your own due diligence beforehand. Honestly, your investor(s) will value you more if you are prepared to do that - they will see you can negotiate and do a good deal.
Thomas M. Loarie
1
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"Bringing Entrepreneurs and Technology to Life" CEO and Chairman, Mentoring and Coaching of C-Level Executives
Check with CEOs of other companies who have been funded by potential investors. Some segments today are polluted with predators. The burden is on you to turn over every rock. There are some very good investors but like a sine wave, there is flip side and there are also some very bad actors today.
Robert Clegg
0
0
Robert Clegg Entrepreneur • Advisor
Game Based Learning Expert
There is no negotiation if there is only one group of investors.
Thomas M. Loarie
0
0
"Bringing Entrepreneurs and Technology to Life" CEO and Chairman, Mentoring and Coaching of C-Level Executives
Robert, this is very true. That is all the more reason to do your due diligence...and continue to seek out other sources of capital.
Scott Elrod
0
0
Scott Elrod Entrepreneur • Advisor
mHealth technologist☁ex-COO/CIO@Cloud 9-tech for behavioral health■ex-CIO@AmeriDoc(now Teladoc) healing 1.5M patients
1 word: Zombies.
long version: VCs have to raise funds via LPs and then answer to those investors. Sometimes they give back 3 yr positive returns, but not always. If they have difficulty raising the next fund, they'll still keep their doors open even though they do not have capital to deploy. Or...they're just harvesting business plans from young startups to gain inside intelligence to support their existing portfolio companies.
more:http://www.daniellemorrill.com/2013/04/zombie-vcs/
David Brown
0
0
David Brown Advisor
VP Engineering at Pleora Technologies
Beware of VCs that are conflicted but aren't upfront about disclosing a similar investment they made previously. I have seen them play dumb hoping to get inside information. I think this is a version of what Thomas is warning of - predators.

Also consider that VCs love company and will often quietly disclose confidential information to their friends hoping to bring them in. When you speak to a VC you are often speaking to many of them through the grapevine. If you want to keep a secret don't tell anyone especially a VC.

I believe that one has to be open with investors, but there is a fine line to walk in the courtship phase.


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