They see the dollars are always green but not all investors are created equal. I made a short list of patterns that differentiate the bad investors from the good ones. The context here is for early stage investment. The rules are a bit different for later stage:
I’ll invest if Seqouia invests
An investor tells you “I’ll invest if Seqouia invests” – every now and then you will have an investor saying something along these lines. Well, if Seqouia invests, any investor will want to co-invest so this has zero value from the entrepreneur perspective while on the other hand the investor wants you to contact him and give him a chance to invest last in the round. This is also known as a ‘call option’.
Ask to send materials to qualify for a meeting
I love it when investors say “we invest in great people” but screen based on slides. My slides usually have very little words in them. I can reference a dozen articles about why slides should be minimalist on words. This one by David S. Rose called “How to pitch to a VC” is highly recommended for a bunch of reasons http://on.ted.com/cu5E. So it means that the better the slides are the less someone can understand the story by looking at them. If you want to invest in great people, the qualifier should be a resume.
Focus on excel spreadsheets for seed investments
While spreadsheets are common to evaluate later rounds, they are completely irrelevant for seed stage investments. If you have numbers to backup your story you are already in A round. For pre-seed and seed investments, excel spread sheets are pure projections. Is the ability to project the most important thing in a founder? Not likely! Investors just use this as a trick to keep you in touch with them at the expense of your sweat.
Back out of an investment commitment
This one is very likely to be a death sentence for the company. Very few companies can survive a cancelled commitment. The problem is that if it happened to you it’s usually too late. I can say about myself that I skipped pitching to a potential VC once I heard that they backed out of a term sheet.
Commit without stating an amount
You had a great meeting, the investor asked all the right questions and received the perfect answers. At the end of the meetings he says “I like what you do” shakes your hand and says “I’m in”. That’s all great but when you ask for a specific amount he says he needs to think about it. Well, the difference between $500K and $5K is quite big so the commitment isn’t worth much unless you know exactly for how much it is, or at least narrow it down to a range of 20%-25% between the minimal amount and the maximal one.
Delay the process as a negotiation tactic
Let’s say you started fundraising 5 months before the end of your runway. That should be enough time to close a seed round and maybe even an A round. After 2 months of pitching, you have an investor that shows interest and starts a process. If the length of the process will be 2 months you will be negotiating with only 1 month of runway left. Very few people can negotiate hard in this kind of situation. From this reason, startups are losing from a long process and investors are gaining from it. Savvy entrepreneurs know that and ask investors for clarity about their process and a specific timeline. Good investors know that they will lose good entrepreneurs if they delay so they proactively communicate the process.
Ask for aggressive control provisions
When an angel invests in a startup he/she are transferring hard earned money from a personal bank account into your company’s account. I can imagine that this is a very hard thing to do. Because of that, some investors try to get control provisions. These are terms that are meant to protect the investors from different scenarios such as: you spending half the money on a party to celebrate the investment, selling the company for a 1x return, adding other investors he doesn’t like and many others. Obviously, you weren’t planning to do these things anyway but the investor doesn’t know that so they try to control the situation. Well, the reality of seed investments is that it’s 100% about the team. Ideas are almost worthless without a good team to execute on them so the last thing an Angel investor should focus on is controlling the team and limiting their ability. An investor should either trust the founders to do what’s right or simply not invest. Backseat drivers are not helping.