Startup founders must carefully examine their potential investors before onboarding one during a round of financing. Entrepreneurs must thoroughly check their track records, values and management style. When raising capital you should have people who believe in your business and are able to maintain a long-term relationship that has to work at every level. Investors should be capable of adding value to your business in the form of business development, partnership opportunities, further rounds of financing, strategic advice, sales, risk management, PR and so on.
However, entrepreneurs mostly come across investors who are lethal and far away from adding value and instead prove fatal to their business success. Therefore, founders must be fully aware when raising funds and try to determine what is good or bad for their startup. Rather than relying on what is being presented to you, do your own homework and take legal advice from a reliable source before taking that big decision.
Below I have put together 7 types of investors that entrepreneurs must avoid at any cost:
This type of investor tends to take advantage of an entrepreneur’s lack of financial experience. The sharks usually make light of entrepreneurs who don’t know their own business well enough in terms of sales and profit. Big-dreaming entrepreneurs eagerly take money from them without carefully going through the terms of the deal. Beware of shark investors and seek out advisors to avoid them.
Investors who Like to Litigate
Litigious investors try to exploit entrepreneurs by intimidation, threats and lawsuits. They very well know that startups don’t have enough resources to fight them and hence threaten them of taking to court. They simply want their returns and control over the company. It’s advisable to check the track records of investors before taking on them.
Academic coach investors will love to hold your hand and offer constant advice on how to run a business. Though it’s helpful for your business to have a good advisor and mentor. But if they overdo it and desire to be supportive 24 hours a day, then you might start to lose patience. It’s better to maintain a distance from them to keep the relationship smooth and running.
This type of investor feels that they are superior to others. They are egoistic and love to dictate the terms of investment and future key business decisions. These investors would be overcritical of the strategic decisions you take and try to dominate everything. Look for investors who will treat you equally rather than someone dictatorial.
These investors don’t have the means and have liquidity issues. However, they don’t want to leave the domain. They pretend to be good investors as they will ask you numerous questions and will try to investigate one or the other thing but never come to closing the deal. When you think if you have spent sensible time dealing with them, ask for a straightforward close or learn to walk away.
Some investors may be financially sound but do not understand business. They are not aware of the challenges faced by the startup companies and tend to ask superficial questions. Getting involved with this kind of investors will never lead to a healthy and long-term relationship.
Brokers Acting as Investors
They might not be the actual investors who will invest in your business. Instead, they are licensed investment brokers or consultants who will assure you to find a perfect match. They will demand a fee to introduce you to genuine investors. You need to perform due diligence on the real investor and then start the relationship.