Avoid scams: How to choose your investor?

Recently, a friend of mine had a very bad experience with a scammy investor. They were in talks to do a round, but the conversation dragged on and on and never materialized. For whatever reason, the investor promised to be something he wasn’t and invest money he didn’t have. In this video, I’ll help you avoid such an unpleasant situation my friend was in. It’s about spotting scammy investors, learning about proper due diligence and how to evaluate if the potential investor is the right partner for your business.

Video transcript

Hey. So, unfortunately, startups aren’t always just a happy place. Recently, a friend of mine had a very bad experience with an investor or namely, a potential investor. They were in talks to do a round; they had been exclusively talking to the investor, they have promised the term sheet, and then they realized that conversation dragged on and dragged on, and eventually, it never materialized.

This reminded me of a question that I often get, which is “How to spot if my investor is a scam or how to avoid bad investors?” or any variation of that question.

I see how you can end up in a situation like that because there are people out there that promise to be something that they’re not or promised to have means that they do not actually have for whatever reason. My learning from seeing similar situations, luckily, I’ve never really been in one before, is that due diligence is a two-way street.

Due diligence

What I mean by that is when investors will start talking to you, and they will go through the process of potentially investing in you, they will do more and more due diligence. That means they’ll do reference checks; they’ll check your product, they’ll figure out if you are the real deal, if you are actually what and whom you are claiming to be. I think it’s super important for founders to do the same thing and talk to their investors about how they can verify the thinks that they claim, but also do their own research.

Often, I think founders look at investors as being on a different level. And therefore, we are looking for money, and this is one or the way to get money. But I think it’s much more important to think of investors as partners; you are entering in a very long-term relationship, kind of like a marriage, it’s very hard to have a divorce if you’re investing, so it’s even more important that you do your due diligence as well or use a nicer word, just get to know one another very well.

If you are currently in a situation where you’re thinking about finding out more about the people that you’re talking to about potential investors, here are a few things of how I’ve approached it in the past and what I would recommend to every founder to do.

Check your investor’s profiles

Number one, of course, you, you speak to your investor and listen to your gut feeling. That can always give you a very good direction in how well this is going to go.

Second, just the public profiles, check them out on Crunchbase. Check them out on AngelList, check out their LinkedIn, have a look at how they’re interacting on those platforms. If there’s any founders or anyone else commenting on their posts. And I’m not talking about stalking anyone, and also, I think if someone doesn’t have an AngelList profile, that’s by no means a red flag. All I’m saying is to use public information, show interest, and look them up. Social media… watch conversations that they’re having. Do they have a YouTube channel? Do people respond to them? Whether the questions that are being discussed are those in line with the role that they’re claiming to have towards you? That will be the second step.

And third, a very important step, ask for references. Ask your investors to talk to people that they have previously invested in. You can also make it a bit more concrete and ask for a specific portfolio company if you don’t want them to pick whom they’re going to introduce you to, and just have a very normal conversation with that other portfolio founder.

So for us, we often were super open to that. We always recommend companies that we’re thinking of investing into to have a chat with one of our portfolio founders. Of course, maybe not five because the time is super valuable, but we usually let them pick or we recommend them someone that is in a similar industry or at a similar stage. Because we also think it’s important that there is a mindset match, not just an economic match when it comes to the term sheet.

Ask questions

When you talk to those founders, ask them about challenges that investors help them with, ask them about disagreements that they’ve had, ask them about ways in which the investor has contributed, and provided value after the investment. And I’m sure you’ll come up with lots more questions.

So in short, if you want to protect yourself from ending up in a bad situation like my friend to unfortunately gave exclusivity to an investor who turned out to be not someone that was truthful and actually wanted to make the investment. He lost a lot of time, energy and money in the process.
Do your due diligence as well, do it in a nice and friendly way. Use public resources, social media, just check out if their public image matches what they’re claiming towards you. And then also ask them for a founder reference.

Talk to another portfolio founder and just have a nice conversation about the pros and cons that the investor has provided during that journey together.

Remember, an investor is not like a one-time event where you work towards them, and you get them to invest in your company. That’s only the start of a very long journey and relationship together. And so it’s crucial that you make sure you talk at eye level and you find someone that you feel both with your mind, and your gut that it’s a good fit.

Hopefully, that’s going to keep some of you from making any bad decisions or avoiding any bad relationships. And with that, have a beautiful day. Stay curious, and I’ll chat to you soon.