The author had to deal with a two-partner VC firm where the ‘good cop’ visits firms and seals deals, and within six to nine months the ‘bad cop’ storms in stirring up trouble
“Shady,” the pseudonym that the author wished to be published under, is an active member of the Asian tech community. This is Shady’s take on investors who are out to get startups for their whims and fancies
The world of startups is fast-paced, cut-throat, and (by definition) there is always a new company on the block, aspiring to be the next Facebook, Uber or Airbnb.
Every now and then, news outlets report the latest optimistic happenings – ‘We have just signed an angel investor’, or ‘We have just released a new beta’. However, not all is sunshine and rainbows because you are rarely shown the tough times or a glance into what goes on behind the scenes.
The startup ecosystem, as with all industries, has a dark underbelly which often gets overlooked. We would like to change that by sharing our experiences and shedding some light on how to tackle the figures lurking in the shadows!
Angels and demons
We recently encountered such a character, people who wielded significant power in the world of startups: the investors. As shareholders and stakeholders, investors have the power to make or break a fledgling company, sometimes to their fancies and whims. That is when your greatest support may just turn into your worst nightmare.
Here is an example of who we refer to as investors from hell: a two-partner investment company currently terrorising startups throughout Southeast Asia. To date, it claims to have seven companies in its portfolio, which could well be a lie you can never be too certain].
This so-called ‘angel’ investor team is, in reality, the devil in disguise.
The ‘good cop’ visits firms and seals deals, with the company investing up to US$100,000 each round. Shortly after making the investment, perhaps within six to nine months, the ‘bad cop’ storms in stirring up trouble, either falsely calling out the founder on projected numbers and milestones, or barefacedly accusing the founder of fraud, sending the startup into a tailspin.
When the dastardly duo’s demands are not met, they start ruining lives. They will take over the Board and create a huge amount of work to crush founders, driving them into depression.
Their ultimate end goal is to get other co-investors to buy them out – a quick cash-in before moving onto the next deception. If that fails and they do not get their money back, they try suing the founder and directors of the company for misrepresentation or fraud.
So now, what? How do you fight these demons? How do you win against Lucifer?
In The Art of War, Sun Tzu accurately summarises it, “If you know your enemies and know yourself, you will not be imperilled in a hundred battles… If you do not know your enemies nor yourself, you will be imperilled in every single battle.”
Here is a quick due diligence checklist before signing any agreements with investors:
1. Do your homework: Check the investor’s history, positive and bad, with an objective viewpoint. If you need to, do seek second, third opinions from people who are not financially or emotionally involved.
2. Speak to other founders in the investor’s portfolio: Ask about their experiences, whether they have had any problems in the past? If there have only been disgruntled exchanges, this may serve as an alarm bell.
3. Give yourself a period to calm down and reflect: Do not let the money and figures get to your head. It can be very tempting to latch onto a great-sounding deal to obtain some much-needed capital for your growing company, but do not rush headlong into any major decisions or commitments without an objective assessment beforehand.
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4. Get legal help: Check for previous lawsuits against the investor. Ensure that there are no businesses which raise warning flags affiliated with the investor.
5. Assess the source of funds: Where is the source of the investor’s capital? Are they still involved with the same companies? If not, why?
6. Finally, trust your gut instinct: Getting an investor is a long-term relationship, akin to a marriage. You certainly do not want to be jumping from a frying pan into a fire with the wrong people, for a marriage made in hell.
If, despite your best efforts, you do get caught up with the investor from hell, seek legal assistance. Make sure you have your numbers, projections and company registration documents in order first to present a strong and clear argument.
The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, please send us an email at writers[at]e27[dot]co
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