More than money, I need reliable partners to help my startup succeed
As a 3-time founder working on startup number 4, I started thinking about the reasons I would refuse to take an investment from a venture investor.
On one hand, money is money, and my next startup will need a lot of green to scale. However, after 3 startups I’ve learned that not all money is created equal.
The days when investors could treat startups poorly, dictate terms, and say take it or leave it are over. With so many new funds throwing money around, a founder now has choices. But it isn’t easy to know how to choose.
Some investors will actively help me build the business, and I can count on them to be there when I need their assistance. Others will give hand me a cheque and ask for quarterly updates. And some will make big promises and end up wasting my time or worse. But how to tell the difference?
An investment is like a marriage, only worse. Unlike a marriage, there’s no way to get divorced. We’re stuck working together for the next 5–10 years. So I’d better choose my investors well.
I don’t need them to be my best friend. In fact, it’s better if they’re not. I need investors to push me with uncomfortable guidance and hit me with the unvarnished truth.
But for the relationship to work I need to trust them completely, and feel they trust me, too. I need to expect they’ll support me when I need them. Otherwise, I’m better off bootstrapping or crowd-sourcing the round.
In general, the funds that offer the best combination of cheque size, terms, and value-add (assistance, reputation, etc.) will be my preferred partners. But no matter how great the offer, no matter how famous or connected the firm, no matter what they promise, if I don’t like the partners, don’t respect them, don’t trust them, then I have to say, “thanks but no thanks.”
Here are my 14 reasons to turn down a VC and look for another partner.
1. Treating Me Poorly: I need the VC’s money to build my business, but that’s no excuse for treating me like crap. If the partner acts like a jerk now, it will only get worse after they’ve made the investment. I don’t want to spend the next 5–10 years being pushed around or condescended to. I’ll find someone who respects me.
2. Not Keeping Promises: VCs have a reputation for making big promises: they’re going to help me grow the company, find other investors, help me recruit employees, put me in front of customers. Great! I could use the help. But will they follow through, or is it all bullshit? I need reliable investors as much as I need reliable employees and partners. I’d rather have an investor who promises nothing than one who promises the world but fails to come through.
To get a sense of what to expect, I look at whether they follow through on small promises at the beginning of our relationship, such as introducing me to potential customers. And I check with other founders in their portfolio to find out what promises they made and whether they came through.
3. Standing Me Up: Yes, Mr. Hotshot Venture Capitalist, I understand your time is incredibly valuable. But excuse me, so is mine, arguably even more so than yours. No matter what emergency comes up, you can find 15 seconds to send me a note to reschedule with an apology. You don’t show up, there won’t be another call.
4. Ghosting me: I didn’t hear from you for months, you didn’t reply to any of my follow ups, and now you’re interested again? How do I know you won’t ghost me again when I need to close the round? Maybe not a showstopper, but since I was at the bottom of your list until now, I’m putting you at the bottom of mine. Sorry, I’ll get back to you when I have free time.
5. Name dropping: “I was having beers with Tim Draper and Elon Musk the other day and they agreed with me that battery tech is the future.” Hmmm. Are you really best buds with Tim and Elon or just happened to be at the same conference?
Name dropping to prove you’re important because you associate with important people may impress the noobs, but it annoys the hell out of me. More importantly, it’s my experience that name droppers are usually bullshitters who talk big and don’t come through. It’s not a showstopper, but it’s a red flag that makes me skeptical.
6. Talking Shit About Other Investments: I want to hear your insights into why some of your portfolio companies are succeeding and others are failing to take off. But just saying the founders were idiots who didn’t follow your genius advice is less than helpful and never the whole story. If you’re talking shit about your other portfolio companies, I’m sure you’ll trash my reputation later, too.
7. Bait & Switch Terms: We agreed on a valuation of $9.5M. But the term sheet you just sent me says $9.0M. Or the term sheet says $9.5M, but includes penny warrants that effectively lower the valuation. I understand it’s a negotiation. I understand your investment committee made the change over your objection. But if you throw a term sheet at me that’s different from what we agreed, I will rip it up and start over with a different investor.
8. Unfair Terms: You want what — a 4X liquidation preference? $250K management fee? That may be good for you, but it’s not fair to my earlier investors, not fair to my employees. Yeah, you work for your fund and your job is to negotiate the best deal you can. Still, if you’re trying to use your negotiation power to stick it to me now, it’s only going to be worse when the company hits a downturn.
9. Treating Co-investors & Earlier Investors Poorly: Are you rude to other investors, try to push them around, dictate terms, unwilling to collaborate? Do you ask for terms that are unfair to earlier investors, or side letters that are unfair to other investors in the round? If so, that’s a good clue how you’ll treat me, too.
10. Passing Confidential Information: I understand you don’t sign NDAs. But you’ve assured me that I can trust you not to be blabbing our secrets. Then you turn around and shoot me the pitch deck of another company in my space. Hmmm. I appreciate the inside information, but if you’re treating the other company this way, I’m sure you’ll do the same to me. I’ll have to be careful what I tell you, which is not the foundation of a healthy partnership.
11. Talking of Replacing Me: Please understand: this is my company; this is my baby. I’ve invested my own money and that of my friends and family. You want to bring in people to coach me? Wonderful! You want to suggest people to help fill out the team? Great! You want to suggest that at some point, we bring in a big gun to take the company to IPO, I’m happy to have that conversation. My only goal is to make the company successful. But if you don’t like me as leader, you’re not the right partner for me.
12. No Funds Yet: This has come up a shocking number of times. Only after signing a term sheet, a VC admits they don’t actually have any money in the fund yet. I’m happy to talk to you when you have an actual fund but right now I need to spend my time on people who can write a check.
13. Charging Fees: Charging fees to pitch? No way. Screening fees? Nope. Upfront legal fees? Run away. I understand the lead investor may get their legal fees reimbursed after the round is funded and I’m okay with that so long as it’s capped at something reasonable. And charging a little money to be part of your pitch competition — that’s different. But if I have to pay a significant amount to pitch you, I’ll pitch someone else instead.
14. Poor References: If the founders in your portfolio and other investors have war stories about you instead of glowing reviews, I want to know the details. Did you force a sale of a startup too early to meet internal fund goals, were disruptive during board meetings, quick to threaten to sue? Did you you support companies through challenges or use your leverage against them?
Just as investors will do due diligence on me and my company, I will do due diligence on my potential investors. Talking to other founders in your portfolio is the best way to find out what to expect once an investor is on my cap table and on my board. Because building a startup takes a village and to have the best chance to succeed, I not only need investors’ money, but I need them to be active partners in building the company.