You invested how much based on what plan?!?!

I sometimes get called in to help folks who, let us say, got sold a bill of goods. It sounded great! It looked good on paper. But they didn't do enough of the right kind of diligence. Or they put in too much too soon. Or they missed something really important.

I hear again and again about $10M investments - $50M investments - $100M investments - in "startups" that somehow fail to pass the laugh test of due diligence. Like the diabetes testing companies that don't bother to go through FDA approval! (see "FDA Warns Against the Use of Unauthorized Devices for Diabetes Management"). Yes - there is more than one such company illegally selling such devices. And at least one of them took lots of investment in (many millions), and the investors apparently didn't bother to check if it was legal.

Once bitten - twice shy?

That is more than a bit disturbing. But not nearly as disturbing as the side effect on legitimate companies who have to compete for funding with these folks:

Many investors are like lemmings following others into the sea

Private equity investment uses largely irrational decision-making processes. By the way, so does a lot of public equity investment... Each wants to follow someone else over the investment cliff. Another $100M into Uber? Sure! $1M into a 5% chance of becoming the next Uber? Sorry... Note that these big "startup" investments are not doing all that well - the so called unicorns are only amazing returns if you get in early and don't get seriously diluted.

Just to be clear, 5% chance of becoming $1B - put in $1M for 10% preferred (limited dilution) early on - wait 10 years and have 10% of $1B = $100M. Do this 100 times and you will have 5*$100M = $500M in 10 years. 5x in 10 years is LESS THAN the average (historical) angel (less than $100K per percent with proper due diligence in a diversified portfolio for angels working in groups) return (~24% IRR) and MORE THAN the average Venture investment (~3x in 10 years).

The way most private equity investors seem to go with their investments is to use social proof over diligence. They invest because others have invested. "If you get a lead investor, we will invest $500K" is pretty much a common statement we see from entrepreneurs. Will they actually do so?

Here's an idea. Always carry an investment agreement with you. Include in the terms a blank for the amount and name of the investor, and a term that says their investment is triggered as soon as another investor invests a similar amount. When they make the ridiculous statement, pull out the agreement and say "Fantastic! I just got one. Sign here and give me your check, and welcome to our family." Want to bet they were just blowing smoke? As an aside, get two of them and your statements were true - each was the others' lead investor. A letter of intent might also work. Same basic idea. Get a written commitment and see how many will sign.

Did I mention?

We help grow companies!

We offer FREE resources! Use them!!

Want to do a presentation and see if we can help you?

Apply to Present
(The Application is Free)

Just had to put in that ad... but seriously...

As a CEO of a startup, you have to deal with all the failures the investors have seen before and their views of the world:

In summary

My actual advice is to simply be honest and show your knowledge as well as you can. Be prepared (I was a boy scout after all) for the questions and have a right answers for your business in your field. "We have gotten FDA clearances on 5 similar devices in the last 10 years and will be seeking it in year 2 - as shown in our slides" (or something more natural for the situation).

You can only honestly present (brag about) the things you actually have/do/are/etc. by stating the truth in a favorable light and not trying to hide anything important and negative. Address the challenges head on (in the middle of the presentation) and show the real promise of what you have at the beginning and the end.

Go To Angel

Copyright(c) Fred Cohen, 2019 - All Rights Reserved