I’ve been involved with 12 startups across Europe, the US and even Tunisia, and dealt with a lot of investors. I’ve learned that a lot of things can go wrong. You need to profile your investors to find the ones that best suit you. This is a long term relationship, not unlike a marriage.
Let me give you a few examples of investors you don’t want to ‘marry’:
1) Ant investors
These are the investors who will only put in tiny sums. They seem helpful, but the sheer numbers of them can sap your energy and kill your startup.
There is one biotech company I know, for example, with an incredible breakthrough treatment in vascular health, which can help patients avoid diabetic limb amputations and cardiovascular operations.
It wasn’t taken seriously to begin with, however, or else pharmaceutical companies saw it as a threat. So, after the first positive clinical results, the management opted to raise capital from retail investors, with small investments. This was fine at first, but now the company is raising a $15m series-D round, and has a problem with managing its 1900 individual investors.
So think about not spreading yourself too thin, to not block strategic investors. Have a minimum ticket size, and stick to it. Or at least, if you do crowdsourcing, give people nonvoting shares.
2) Greedy sharks
Another early sector startup got an offer from a principal investor in the food industry. It turned into a nightmare, because it turned out that the investor’s aim was to take over the whole company as cheaply as possible.
The investor demanded to have the chair position and bullied management in a way that every decision approved would go in its favour. I was on the board, as an investor and advisor to the two founders and in the end I had to take over as chairman in order to stop the company from being pushed in a direction it did not want to go.
Be wary of investors' motivations, particularly of those from your field of operations. And careful with those who push to take control of the boardroom as a prerogative to the investment. Ask yourself, what are they looking for and why would they invest to start with?
3) Lazy ‘so superwell-connected’ door-openers
When I began work on two startups in Tunisia, I was advised to take influential local partners as shareholders: “Go with them, they will guarantee your business will succeed.” They were supposed to help us make local connections and navigate through the business culture.
These kinds of investors always tell you all the great things they will do for you. But then they don’t do them. In the end, I would never do that again. It was very clear that they expected us to do all the heavy lifting while they sat back waiting for the big returns.
Yes, you may need experts going into an unfamiliar market, but look closely at their track record. Ideally, you should vet your investors are closely as they vet you.
4) Instant return seekers
When you create a startup, you think you have a clear idea of the problem you are solving and how to get there. But things always take unexpected turns.
One hydrodynamics startup I invested in had underestimated how long it would take to make a return. It was taking longer to get ‘normal users’ to adopt the solution than they had expected.
This is pretty common, but unluckily the investors included a number of quick buck people who quickly became frustrated and made the atmosphere very toxic. Every meeting became a struggle between the investors and the leadership team.
It killed new ideas — and very nearly the company. The marriage with these investors turned so bad that they wanted to exit at crazy low valuations destroying the fundraising path, just as milestones were achieved.
Recently, there has been a breakthrough for the company and the wind has turned in its favour. But you need outstanding cardiovascular health to survive such fights and keep the team motivation.
Startups need to look for smart money that gives you the time to rethink and adjust when unexpected things happen. The more breakthrough the tech, the more uncharted is the water. You don’t know what you don’t know.