- Getting a bad investor into a startup
can have disastrous consequences.
It can literally kill a startup.
I've seen it happen.
Today, we're gonna look at how to spot a bad investor
before they invest, and preferably,
before you spend a lot of time with them.
I will give you six ways.
Six tells how to spot a bad investor.
These are methods I've used to spot some bad, bad investors.
This is Raw Startup.
I've been through literally hundreds of investors.
And for Vivino alone, we've raised $200 million.
Our last round was a staggering $155 million.
I've been blessed with fantastic investors in Vivino,
people that helped us build Vivino,
and supported me throughout the years.
But I also have dodged a bullet a few times,
with some really, really bad investors.
I've avoided them by using the strategies in this video.
Getting a new investor on board is about
building a relationship, then, over time,
getting them to invest.
As you build that relationship,
the art is really to see which ones are the good ones
and which ones are the bad ones.
So you can spend your time on what's important,
building the business and talking to the good investors.
I know the feeling, you're about to run out of money,
you badly need an investor.
You'll basically take money from anyone
who's willing to put money into the company.
I've been in that situation
and it's very, very hard to say no to an investor.
Let me tell you about a story once,
I was about to close a big round, we were in due diligence,
I could smell the money in the bank.
It was almost there.
At that point, the investor started to be
a little bit unreasonable,
asking strange questions, unreasonable questions.
My chairman called me and said, "You know what?
"If these guys are so difficult in due diligence,
"what are they gonna be like working with
"once they invested?"
I was focused on closing the round,
getting the money in the bank and said to the chairman,
"You know what? Let's just get the money in the bank.
"I'll deal with it later."
We ended up taking their money,
but my chairman was right, and I was wrong.
These guys ended up being very difficult investors
in the year to come.
We should not have taken their money.
I ended up ignoring number five on this list
and paying dearly for that in the years to come.
With that, let's get started.
Number one, misses obvious things.
When you raise money for a startup,
there's always one thing that isn't quite like it should be.
One thing that really isn't perfect.
Turns out, startups are not really perfect.
Maybe the growth is a little bit too slow,
maybe the retention is a little bit too low,
maybe there's a missing co-founder.
There's always something.
As a founder you know what that is,
maybe you saw it yourself, or almost all investors tell you.
Like I said, almost all the investors tell you,
not the bad ones.
However, the bad investor often misses the obvious thing.
The one thing that all the other investors mentioned,
the bad investor misses.
So if there is a thing
that all the other investors mentioned,
but not this one investor,
maybe you have a bad investor on your hands.
So keep an eye out for the people
that miss the obvious things.
Number two, wants too much equity.
What can I say? This is a classic.
An investor comes into the company
and wants 50% of the company.
This can be devastating for a company,
and any good investor knows this.
One investor taking too big a bite of a company
too early on can really block a future investor.
Turns out, investors don't like startups
that are mostly owned by investors.
Oh, they don't like startups
that are mostly owned by themselves.
That's interesting.
The founder will soon lose interest in a company
they only own a small share of.
So now the investor owns 50% of nothing
rather than 20% of something great.
Great investors want founders and employees
to own a meaningful part of the company
because they're the ones that are gonna build the company,
not the investors.
A lot of startups rely on future investments too and
this kind of behavior can really block future investments,
even a mediocre investor knows that.
In theory, you can keep on doing 50% investments
into a company, but really, pretty soon,
founders and employees will have
a small, small share of the company and will lose interest.
When they leave, there is no company.
The investors might have to move in to save it,
but they don't know how to run a company.
Every investment round should be around 20% of the company,
if you're above 30, you're probably in trouble.
Number three, the investor is too slow.
Obviously, the most annoying thing with an investor.
But there might be some good news for you.
The good news is that
you shouldn't deal with a slow investor, let me explain why.
A great investor knows that
as soon as they see a good investment,
everyone else can see it too.
This means that the great investor knows
that it's crucial to move really, really fast
before someone else takes the investment.
If it's a great investment,
the startup's probably talking to others too,
so for the investor to move fast,
it's crucial to get their hands on the investment.
There is obviously the chance that investor's slow,
because they're not that interested.
Well, if they're not that interested,
you really shouldn't be wasting your time on them anyway.
So the bottom line is that if the investor is slow,
forget about them, either they're not very interested
or they're just a slow, bad investor.
So if they're slow, forget about them.
Number four, no references or bad references.
Some investors, unfortunately,
become very, very different beasts once they've invested.
They go from being the nicest people in the world
to being a pain in the butt.
The only way to find out
if that's the case is to check references.
Have a chat with other startups where they've invested,
you have to check references.
Talk to the founders, it's great networking anyway.
See what the investors
are really like to work with post-investment.
If it's a big institutional investors,
they have a website full of references.
They should be easy to find.
And in my experience, fellow founders are very nice
when it comes to giving references.
If it is the investor's first investment,
it might be a little bit more difficult.
Then I would suggest you find someone
that the investor has worked with.
Go on LinkedIn and go somewhere,
you have to check some references.
Very often the investor can give you some references
that you can call,
but I would recommend also doing back-channeling,
meaning talking to people
that the investor doesn't know you're talking to.
You can find them in the same way, look at the portfolio,
maybe look at LinkedIn, or something like that.
You sometimes get a little bit more of an honest opinion
when you talk to people that
the investor doesn't know you're talking to,
and not only to the founder
that the investor cherry picked for you.
And finally, don't ever ignore a bad reference,
you have to find out why this was a bad reference.
Sometimes it's nothing, sometimes it's really serious.
So figure out why this was a bad reference.
Ignore a bad reference and you'll end up paying for it
in the years to come.
Okay, in case I didn't say enough,
make sure you check your references.
Number five questions, questions and due diligence
not proportional with investment.
An early stage startup will not have the same resources
and structures as a more mature business has.
All great investors know this.
However, a bad investor might ask questions
and ask for things that just don't make sense
for an early stage startup.
That's one thing, the other thing is that
the due diligence has to be proportional
with the investment.
You can't make a $10,000 investment and ask 50 questions
and expect the founders
to spend a hundred hours on answering your questions.
The questions, the due diligence have to be proportional
with the investment.
And there is a lack of balance here.
It can take an investor seven seconds
to ask a question that takes 10 hours to answer.
Every great investor knows this.
Smart experienced investors will not waste their own
or the startup's time on things
that are just not realistic for an early stage startup.
They know that there's risk involved in early stage startup,
all kinds of risks.
Amateur investors on the other hand,
will ask too many irrelevant questions
that suck up the time for the founders,
even for a small investment.
It just doesn't make sense for the investor or the startup
and can really hurt the future of the startup,
as it sucks up the time and resources.
Number six, tells founders specifically what to do,
or as some call it, they go operational.
Startups need to be run by their founders,
not their investors.
If you're an investor
and think you can do a better job than the founders,
then the company probably has their wrong founders
and you shouldn't have invested, simple as that.
Yes, great investors will give you direction,
but the founders need to run the company
and make the decisions for themselves,
figure it out for themselves
based on the direction from the investors.
I mean, imagine the arrogance here sometimes,
an investor comes in, who knows the startup
through three months or something,
maybe they spend 10% of their time on it.
On the other hand, you have the founder
that spent 110% of their time on it for the past five years.
The founder must know best.
Bad investors can be know-it-all
and wanna tell a startup specifically what to do.
Great investors know their limitations,
they can give the founders direction,
but the founder knows best.
If the investor comes flying in
and tells everybody what to do,
they're probably a bad investor, stay away from them.
If you have other ways to spot a bad investor, let me know.
And I know there are
plenty of bad investor stories out there,
put them in the comments,
I wanna see some bad investor stories,
I'll give you a comment.
With that, here's the list of the six ways
to spot a bad investor.
Number one, misses obvious things.
Number two, investor wants too much equity.
Number three, investor is too slow.
Number four, no references or bad references.
Number five, questions and due diligence
not proportional with investment.
Number six, tells founders specifically what to do.
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Thank you very much for watching.
Now, stop watching, go build something.
(bright music)