Dealing with Fake Investors
Fake investors may be one of the greatest fears founders have during the fundraising process. Founders fear that giving too much information to an “investor” can lead to a covert operation of their competitor stealing information about their operations. Some are so scared that they require NDAs before telling investors anything about their startup – and they are correct to be concerned. While this fear has some merit since we have spoken to founders who have experienced this firsthand, generally the problems are created in other areas.
However, it is important to remember that not every bad investor is one with bad intentions. It can easily be a real investor who does not have the money yet to deploy. This can either be that he is still raising the funds or that he just finishing deploying the funds. In either case, they may still take the meetings to scout for potential opportunities in the future or to collect market data. Additionally, it is possible that the investor does not have any money at all and is only scouting for other VCs to receive a finder’s fee.
In any of these cases it still leaves the founder with the following problems:
- Idea Theft: As we discussed at the start, this is often the biggest concern. It is the reason many startups begin in stealth mode. While VCs usually will not book meetings with startups that require NDAs, it is okay to ask for them to sign one after initial meetings and they are requesting to see sensitive information (speak to your lawyer to determine when the best point for your startup is).
- False Reliance: No founder should ever rely on a VC for their check until it has been written. However, when founders talk to fake investors, it is easy for them to assume that they will receive an investment once the money comes through (if they are told this).
- Wasted Time: There is never enough time in the day – especially for founders. Having an investor drag you for months without any investment can be the most damaging for a founder.
- Equity Theft: This happens sadly very often, where an investor will convince a startup of their connections and relationships. After a few meetings they tell the founder that they are not able to invest money (for any number of reasons) but will be happy to help them for equity but then never perform the way they promised. Advisory shares can be extremely beneficial for startups, but without the performance of the advisors, it is similar to just giving the shares away for free.
While it may seem difficult to determine what type of investor you are looking at, there are steps you can take to potentially uncover an unsuitable investor on the first meeting:
- Background Research: Talk to other startups that have worked with this investor or VC. See what their experience was like and how long it took them to write a check. If there are no startups to talk to, then be very cautious about why your startup will be their first investment. It does not mean you should avoid the meeting, but rather you should be more vigilant about their motives.
- Ask Questions: VC investing is a two-way street. Just as the VC spends time finding the right startup, founders should make sure they are working with the right VCs. Founders should never shy away from asking questions and learning more about how the VC invests and the timeline it can take. This is also a point where you can see what type of investor you are talking to.
- Using Thunder: Our platform offers a feature called “Investor Velocity” which shows the number of investments a VC has made in the past few months. If the deal rate has dropped significantly, then it likely indicates that the fund is running low on their deployable capital and it is much less likely that they will invest in your startup.
In the end, it is impossible to determine who will or won’t invest in your startup, and being lured into meetings with investors who have no capital is possible even with all the above precautions. It is important to accept this reality as a founder and pass on information about VCs and investors to fellow founders so that they do not fall into the same trap. In the end, VCs need a good reputation to get the best deals.
Fundraising Demystified Episode #13 is Live with a Branding Refresh!
In this episode, we speak with Michael Houck, co-founder of Launch House. He discusses how he started his entrepreneurial journey with no connections in Silicon Valley and worked his way into roles at Uber Eats and Airbnb. Houck then started Launch House during the height of the pandemic as a way to be around other people. This led to the founding of Launch House, a co-living community for founders. The concept gained attention and momentum, leading to a successful capital raise.
In this episode, we dive deep into Michael's journey of capital raising from A16Z at Launch House, his experiences as a founder, and so much more.
Here are three major takeaways from this insightful conversation:
- Building Connections from Scratch: Michael shares his inspiring story of starting his entrepreneurial journey with zero connections in Silicon Valley. From growing up on the East Coast to cold emailing his way into a role at Uber Eats, Michael's path is a testament to the power of determination and resourcefulness.
- Navigating Challenges and PR Crises: As a founder, Michael opens up about the challenges he faced, including a major PR crisis last September. He discusses the importance of having a supportive network of investors and the resilience required to overcome tough times. It's a reminder that even in the face of adversity, with the right mindset and support, we can come out stronger.
- Leveraging Existing Audiences for Success: Michael also shares his insights on the power of using existing audiences and newsletters to launch new projects and gain early success. Whether you're a founder or part of any industry, this Megaphone strategy can be a game-changer in reaching your target audience and achieving your goals. Listen Here
Fundraising Demystified Episode #12 is Live!
In this episode, we speak with Eziah Zaidi, the CEO of Mend Labs, a life sciences and digital health company on a mission to improve societal health and healthcare delivery. They've recently raised a $15MM Series A bringing their total capital raised to $20M.
In this episode, we discussed some fascinating topics, including:
- The mission and vision of Mend Labs: Eziah shares the challenges in healthcare that Mend Labs aims to address. They have developed a technology platform and a behavioral model, along with a food-as-medicine core philosophy, to improve patient outcomes and position them for long-term success.
- Fundraising journey: Eziah takes us through the journey of raising capital, from the early stages to the recent Series A funding. He shares insights on the milestones and key performance indicators (KPIs) they monitored to make their startup Series A ready.
- Relationship building and warm introductions: Eziah highlights the importance of building relationships with potential investors and leveraging warm introductions. He shares his targeted approach to getting in front of mission-aligned investors and the benefits of skipping the necessary relationship-building when you come in cold.
- Overcoming challenges: Eziah talks about the frustrations they faced during the fundraising process, including delays caused by external factors like the collapse of Silicon Valley Bank. He also emphasizes the importance of resilience and having faith in oneself as an entrepreneur. Listen Here
Jason has already roasted 20+ decks during this weekly event. We have received incredible feedback from founders who had their decks roasted or just came to watch.
Click here to submit your deck to receive feedback on how a VC would look at it. This is a RARE opportunity, so don't miss your chance!
What the Experts Have to Say
15 signs to spot a fake investor
Great list of red flags to look for when meeting with investors. It is not always a problem, but it is critical to keep a watchful eye. Read More
How to Deal with Fake Startup Investors
This article does a great job summarizing the negative impacts of fake investors and the steps founders can take. Read More
The Risks of Not Receiving Investment for Your Startup
If you are in a place where you relied on someone to deploy capital but it was withdrawn, here is a good article on what you can do.. Read More
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Written by Jason Kirby - https://www.linkedin.com/in/jasonrkirby
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