The Type of Investors to Avoid for your First Fundraise
First-time founders often need to raise funds through small Angels initially before they can get enough eyeballs to raise some serious cash. Occasionally, such Angel investors will originate from vibrant backgrounds — an ex-supervisor, a wealthy governor, a well-to-do friend, an accomplished F500 contender, an ex-business person, or a privately-run company proprietor.
You will hear a ton of No’s — maybe handfuls, or even hundreds — before you close your first Angel or seed round funding. So when a first Yes stops by, it is fantastically hard to make a stride back and evaluate the estimation of that Yes.
Fundraising is loaded up with agonizing no’s: No’s that blow your mind in how rapidly and inconsiderately they’re conveyed; no’s that are tied up in quite little straps and camouflaged as “how about we stay in contact”; no’s that come through stunning quietness after a progression of promising meetings.
I’ve gathered here a rundown of by-no-means-exhaustive warning signs that can enable you to recognize Angels that aren’t directly for you or the idea, but simply for the money. A large portion of the notice signs below assumes that you’ve completed your due diligence on the investor to guarantee that (s)he is pertinent to your business in any case. Most Angel investors don’t care for being only registration for your business — they additionally need to increase the value of your business on the way to success. Conceivably through criticism of your product/service, introducing new customers, or associations with potential industry contracts. If in a case that you’ve contacted an Angel investor who knows he/she is not the correct fit, you may see the majority of the warning signs stated below.
Is a bit too interested in your valuation and exit plans
Someone told this Angel how much money she made on early-stage investment and our man can’t wait to make 10x on his money. Valuation, any valuation, for an early-stage business is meaningless. By default, unless it is illegal in your jurisdiction for some reason, use a convertible note (like Y-Combinator’s SAFE document) to raise your early investments.
Everyone wants an exit — heck, likely even you do! — but no one wants an investor that is in it only for the exit. Such Angels will become a pain in all the rear ends when your runway is short, and will likely try to force you to an acquihire or lowball deal to help save the $40,000 he put into your business. Be polite when showing them the door.
Asks about long-term business metrics for your six-month-old business.
Conceivably Angel investors that have not started businesses themselves are well-versed in how a large MNC operates but not as much about what a fledgeling business with a few thousand dollars in the bank looks like. They may naively ask for metrics (such as customer lifetime value) that don’t matter to a fledgeling startup. They could mean well, but accepting that money could lead to a host of issues in the near future. Imagine struggling to meet your MNC investor’s expectations when trying to sign on the next paying customer, or deploy the next version of your app. It is not your job as an entrepreneur to educate your Angel investor.
Is stuck on terms of the deal. Or suggests weird Board structures.
Non-standard terms in any term sheet at any round is a warning sign. Usually, an Angel term sheet is overridden when you raise a Seed round from VCs. The majority of Angel investors who have done multiple deals understand this and won’t make a big deal over the terms of investment. Be wary of those that do.
This is rare, but once in a while, you will come across an Angel that wants to see a Board with 5 Directors and an Independent Director. In those rare cases, it is ok to walk out — polite discourse is damned. While having a governance framework is beneficial, even critical at the appropriate time, it is nothing but an expensive distraction at this point.
Is Unwilling to talk about his/her past investments.
Most investors love to talk about their past investments. Some like to talk only about their successes. Others like to talk about their failures. Still, others talk about the ones they missed. Stick to this, No good Angel investor is unwilling over the fact to talk about his/her past investments at all. Of course, there are exceptions and idiosyncratic characters — but most Angels haven’t earned their way into being idiosyncratic yet.
Do not respect your views or your time.
Keep reminding yourself — no one knows your business as you do. Unless you’re building the 175,345th copy of Groupon, this is probably true. If an Angel investor who’s just heard your 10-min pitch starts telling you how to run your business, you know you’re signing up for a rough ride if you take his money.
At times, the angel investor’s perspective of you is quite easier to observe: did he/she arrive late at the meeting without a viable excuse? Did he/she get constantly distracted by her phone? Does he/she give 100% focus on your concept while discussing the idea of your company?
Admit it. Discovering the right Angel investor for your startup business is often as critical as finding the right co-founder for your company. Your business is the most vulnerable in its first year and the wrong investor can have a lasting impact on your long-term vision & growth. Be super wise on this decision.
To maximize the impact of the time you put into fundraising, start early, build ongoing relationships, and don’t be afraid to ask for introductions. And, like all good salesmen, always be closing.