TRC 010: Angels can be devils. 8 types of investor to avoid.May 25, 2023
Read time: 5 mins
When you are raising for the first time, knowing who to accept money from can be super tricky.
You might feel that something is ‘off’ but you might not yet have the experience to spot when an angel investor might be more trouble than they are worth.
Over the years, we have developed a list of 8 types of investor to avoid.
We have included some useful tips about how to spot them.
The Control Freak:
These investors want to control every decision in the company, even though they may not have the necessary expertise or understanding of your business. They can hinder the growth of your startup by imposing their decisions and not allowing you to run your business as you see fit.
How to spot them: They may make demands about operational control or decision-making power during the negotiation process. A great example would be asking for a board seat at an angel round.
In my experience they are far more likely to have come from corporate rather than startup backgrounds.
The Over-Promiser: They may make grand promises about future funding, connections, or partnerships without providing concrete details or proof. Check their track record to see if they've delivered on similar promises in the past. They can lead you to make decisions based on false premises.
How to spot them: The great thing about spotting this type is that they tend to like to make all kinds of promises very early (introductions etc), but pretty much never follow through.
The Equity Hog: By asking for significant stakes (think 20-30%) at dilution levels or terms that are not industry standard, these investors are killing your future fundraising chances - leaving you and the founding team with not enough equity to attract future institutional investors (50%+ held by the founders and the team at series A is a good benchmark).
How to spot them: To justify their equity stake, they typically make lots of promises about what they will do for your business even though they won’t be working in it. It is also typical for them not to have a track record in investing in early stage startups.
The Short-Term Thinker: These investors are looking for quick returns and may push you to make decisions that are beneficial in the short term but detrimental in the long run. They might not be patient enough to wait for your startup to find genuine product market fit or the for the ups and downs typical in any venture backed business.
How to spot them: They tend to over emphasise on financials and exit strategy during early discussions without really getting to know you or finding different ways they can help.
The Overly Cautious Investor: These investors are risk-averse and may hold back your startup from taking necessary risks to grow and innovate. They might resist necessary spending on marketing, hiring, or product development.
How to spot them: They will have a tendency towards emphasising risk during discussions and find it more difficult to engage in discussions about growth, speed and scale.
The Absentee Investor: This type of investor provides funds but is not interested in getting involved in any other way. While this may seem appealing at first, you will often need more than just money. They need guidance, connections, and mentorship, which absentee investors don't provide. Sometimes, you just need cash (don’t run out is the number 1 rule for any startup) and if you were going to take cash from any type of investor on the list, this would be the one.
How to spot them: Discussions with them will be more brief. They won’t offer any introductions or help, and there will be little follow up.
The Ego: These investors often combine many of the traits of the other types listed. They can turn quickly into control freaks and are often over promisers. They are amongst the most likely to make your life difficult - particularly when you need the help the most.
How to spot them: They will want to talk a lot more about them than they do about you or your business.
The Bad Communicator: These investors are hard to reach, don't provide clear feedback, or don't communicate their expectations well. This can lead to misunderstandings and strain the investor-founder relationship.
How to spot them: They may be slow to respond to your communications or provide vague or non-committal answers to your questions. Chemistry is important in founder / investor relationships, and if it feels strained to you from the start, it’s likely that they are not an investor for you.
In the big venn diagram of bad investor behaviour there is often overlap between the different types.
If in discussions, you just get a bad feeling, this is a useful phrase to remember:
‘If in doubt, do without.’
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