Episode 126 – Top Five Mistakes Courting Investors

September 15, 2024

As early-stage funding has become more scarce, and most likely permanently reduced, it is more critical than ever that founders avoid critical mistakes when courting investors. 

Reduced supply encourages everyone to act more desperately.

Desperately seeking funding is no way to support your business.

Here are the top five mistakes founders make when seeking funding out of desperation:

1. You started looking way too late
2. You just heard of each other
3. They are impressed more with your product more than with you
4. They want to get too involved in your business
5. You have no emotional boundaries with them

Number one. You started looking way too late. How do you know this? Well, if you began looking for investors after seeing how low your working capital/cash balance has become, you’re way too fucking late. You are reacting, not acting. Now, you can only seek funding in a state of anxious survival. And no reputable investors have any desire to rescue a business with their money. Investors you want to work with invest in the cream, not the coffee grounds at the bottom of the cup. Only buffoons or VCs with no track record yet invest like this. And when investors do this, watch out, because they enter the relationship with NO respect for you as a business person. None at all. I mean, look, you’re broke, for crying out loud. How did you get here? This unconscious lack of respect will poison the relationship quickly or slowly. 

If you’re in a situation where you need cash yesterday,  you really need to focus on personal loans and cash from family. Desperate money has to come from those who love and trust you the most, not investors. Not from strangers.

Bottom-feeding VCs and convertible debt P.E. sharks love desperate founders, though, because they overlook unfavorable terms…interesting.

Number two. You just heard of each other. Oh, boy. This horrendous scenario was so common in the era of free money. The sudden mutual, product orgasm is one of the biggest red flags fed by every trade show, conference, accelerator, and industry meet up group out there. These events are all about performative displays of enthusiasm for your front panel more or less. The irrationality is so thick you can cut it with a knife. For fuck’s sake, that’s what sales is. Bullsh*t by the shovel full. And then there’s all the alcohol at these events. Get friendly, build rapport, talk your way into alignment. This is the investor conference playbook which spells Voldemort-level doom. Naive founders may not realize that the folks who are talking to them at length at ‘events’ are not top ‘investors’, not the folks you actually might want to sign terms sheets with. Often, they are junior staff collecting market intelligence essentially. 

Now, if no one has done much research on the other party, then this kind of sudden, happy talk is going to end about as well as your average bar hook-up. Someone is going to regret it. And it will almost always be the founder who regrets it the most, years later. 

Your response to the ‘fake friend’, sloppy gripped, happy guy investor at events (or online) should be, and always remain, positive, happy and then, aloof…Slow way the hell down…slooooow dooooown…play hard to get, be VIP. Do it. This ‘power move’ will then reveal pretty quickly, through absence of communication, that they aren’t that into you after all and not into getting to know you as a businessperson. It was just a heat of the moment thing.  By not hastily groveling at their feet, you’ve repelled the worst actors possible. 

Remember, a lot of junior investors are trying to collect P&Ls and other data to study the market. Pretending to be doing due diligence so you give them confidential information is commonplace. 

So, never, even show hasty interest in taking investor money. And never show confidential documents willy-nilly with people you don’t know, including with junior staff of top firms. 

Showing hasty interest attracts the worst actors. 

Number three.  They like your product more than you. This one reminds me of basic red flags in dating. Does she only compliment your car, your apartment and your job/income/financial phallus? Does she mention anything at all related to, I don’t know, your personal values, beliefs, or admirable behavior? Does she respect who you are? Or…are you just a thing with a human attached.

Does your prospective investor respect you as a businessperson and not just a way to gamble with their own private wealth? Or do they condescend to you as someone who needs their wisdom to replace your own lack of it.

You might think that founders wouldn’t be fooled by pretensions to operating knowledge from finance people. You’d be wrong. This kind of irrational, misplaced deference happens all the time when you approach money too quickly and when you approach the wrong money pile. 

Be very concerned about rando investor guy approaching you. Make sure there is some genuine respect in you as a business person, even if you are brand new to the industry. 

There is no excuse for quiet disrespect for founders who understand they are on a learning curve, especially if they have built something into the seven figures.

Number Four. They want to get too involved in your business. 

I once worked with a female founder, who described having to sue an investor and eventually pay them to go away after being subjected to what can only be described as relentless bullying. Text messages all day long. Constant questions. Any hour of the day or night. Random suggestions from a complete, fucking idiot, really. I met the guy. Rich in one industry does not make you a wise CPG investor full of great ideas. 

What this investor was exhibiting was both entitlement due to wealth AND complete insecurity regarding his choice of founder…this level of interference is often a result of deep investor insecurity that goes totally unacknowledged below the surface of consciousness. In the case above, it was a person who was brand new to angel investing in CPG and had, until then, been a lazy follow-on investor adjacent to institutional money. He didn’t know what the hell he was doing.

But the real problem here is that investors are NOT operating partners. They are not co-founders.This is a completely inappropriate position for them to take. It’s dishonest, and it violates the need for a professional and emotional boundary between investor and founder. 

 If they are giving you detailed advice BEFORE you sign terms sheets, run, unless you 100% agree and already planned to do what they’re suggesting! 

Founders need to establish communication guard-rails up front with investors. John Foraker writes weekly e-mails every Friday evening to his Board. He controls the narrative about company performance. He doesn’t wait until Board meetings. Result? No one bothers him. 

The mistake some founders continue to make is to sign documents that allow something called convertible debt. This is an old investor move which basically signals little trust in you as  a business person. They will set performance targets (most likely designed for you never to reach), you will miss them, and the terms then trigger a conversion of the money they loaned you into equity. They seize control essentially. 

Never sign these kinds of deals unless you are completely happy giving away your company. In some cases, some founders are happy to do so, but this is pretty rare. Most of these people basically got bullied and legally swindled.

The only scenario I could imagine where you would want to give away most of your equity and operational control is when you a) realize you don’t want to be an operating founder anymore and b) you have connections to extremely experienced operating teams like the one at Once Upon a Farm. then, you know you are in good hands.

Number five.   You have no emotional boundaries with them.

I’m not a psychologist but I do know that, in business partnerships, it’s critical to use documents and ritualized communications to establish clear role boundaries between investor and founder. Chummy, buddy-buddy, intimate relations are for co-founders and operating partners inside the early-stage company. Any emotional chaos should be contained within. 

An investor is an external stakeholder, NOT an employee. Forget this at your peril. 

The biggest psychological weakness a founder can display is to erase the emotional boundary simply because some rich twerp wrote what, to you, is a very large check. 

Signs of weird boundary-crossing? 

• Buying you personal vacations. 

• Offering you perks from their own business to ‘save’ you money.

• Having you over for meals at their home

• Inviting you to intimate family events long before you even know any of these folks well

• Being very nosy about your personal life, under the guise of compassion, without letting you decide what and what not to share. 

• Defensiveness displayed when you try to set boundaries. 

ALL of the above has really happened folks, repeatedly inside toxic investor-founder relationships, especially among angels and clueless, bottom-feeding VCs. 

Please raise money once you have a seven-figure business that has a strong contribution margin (30% and above) and you have had time, years, to research and come to know investors on a professional basis. And to research their behavior with their prior, i.e. post-exit, portfolio companies. The latter is not easy because investors have a code of silence meant to protect the tribe…and many founders observe it, if they had a decent exit. “They were great” is not necessarily an honest response, if the founder made a lot of money in the end.

Generally speaking, the best investors wait and watch and approach gingerly, in part, because they don’t need you and they are focused on strong operating teams more than infatuation with your product.