Reputations Matter

The right investors can make a world of difference in building a high-potential startup. Wise entrepreneurs will evaluate potential investors just as carefully as investors evaluate potential investments.

When fundraising, it is easy to get so focused on your goal of raising the money you need to build your startup (you do need it, right? If not, then get out there and build the business another way!) that you do not critically evaluate potential investors. This can be a terrible mistake. Early in my entrepreneurial career, when I was first climbing the fundraising learning curve, I made a mistake in accepting an investor who touted his decades of successful (according to him!) investing experience. He brought with him a few additional angels, and I was glad for the commitments as I was raising that company’s first $700K. Only later did I learn that I had recruited an albatross around my neck.

Much to my frustration, as I raised my next several rounds of funding, I discovered that there were several potential investors who would get excited about my company and our opportunities, but when they found out that this individual was an investor, they would sadly say they would not invest alongside him. That was an eye-opener! The idea that investors would refuse to go forward with what they thought was an excellent investment because of some other investor already in the deal was a revelation for me. Reputations matter.

Years passed, and I managed to raise millions more for that company. But, those investors who stepped away were not wrong. At one point, that investor with the lousy reputation actively tried to kill a critical investment in our startup and would have killed the company had he succeeded. Other investors banded together to help overcome the resistance, but it was one of my entrepreneurial career’s most terrifying and emotionally draining experiences. I found out that this kind of bizarre and illogical behavior was something he had pulled with other startups – and those investors who passed knew it. I wish I had known it before I accepted his investment. Reputations matter.

In the end, we managed to contain his toxicity and succeed. And, years later, that investor liked to take credit for the company’s success, even though he was personally responsible for its closest near-death experience. We made his list of success stories in his limited partner fundraising pitch deck. If only those who saw that list knew the truth. Reputations matter.

But the only way you find out about potential “bad apple” reputations is if you make a point of developing a broad base of investor relationships with both those who choose to invest in your startup as well as those who pass but wish you well – and then you ask before you proceed. Just this week, someone suggested that I reach out to a potential investor I have known for decades in this startup ecosystem. I remembered that many years ago, I had a “yellow flag” about this investor from experiences other entrepreneurs had shared. Given that a decade had passed, I thought I would do a reputation check before following through on the referral. I contacted one of my trusted investor friends and asked him what he knew about this particular investor. He confirmed that his experiences interacting with this investor were not good and that the concerning reputation I remembered was still valid in recent years. Reputations matter – and I won’t waste my time calling that potential investor. My team and I do not need to introduce that kind of pain either into our efforts to build our startup – or into our future fundraising when likely a bad-reputation investor will cause others to pass for the reason of their involvement rather than not liking our startup.

What is the potential negative impact of a “bad apple” investor?

Building a startup is hard enough without adding “bad apple” investors to the mix because:

• Bad apple investors can be a huge distraction when they start manufacturing crises, undermine the startup’s leadership team, force destructive changes, or create havoc in the Board room. That negative, destructive energy saps focus from the vital work of building the startup.

• Bad apple investors can be prone to getting excessively involved in trying to manage the company – and instead, waste the CEO and team’s time.

• Bad apple investors can impair your ability to attract other investors, especially other good investors.
  
• Bad apple investors can and sometimes do kill startups.
  
• Bad apple investors can decide to inappropriately share confidential information or call up significant prospects or potential investors to try to raise doubts and increase their leverage.

Do not assume that only major investors can be destructive bad apples, although the weight of their shares can amplify their negative impact. Sometimes relatively small investors can cause a great deal of havoc as well because there are times when you need plenty of signatures or are trying to close a round, and a bad apple investor can punch above their weight class in terms of causing damage to forward progress.

How do you find out about a potential investor’s reputation?

One word: ASK.

Since no one – not you, your team, or your other investors – wants a bad apple in the mix, it is legitimate to ask potential investors for references and to ask around your investor network about others in the ecosystem. Experienced entrepreneurial CEOs will respond to a discreet inquiry about their experience(s) with particular investors. High-integrity investors will often be willing to discretely give helpful guidance on the reputations of others in the investor community. Most of these reference checks will be conversations as few will be willing to commit bad apple concerns to a written email. And, you should absolutely exercise discretion and grace if you decide to say no/walk away from someone you learn is too risky to undertake.

Also, don’t forget to do a Google search. Once, we found that the SEC had convicted a very interested potential angel for fraud. Again, you do not need that reputation associated with your startup in any fashion.

The challenge is usually you are working in overdrive, and it seems like extra steps, but if you manage to avoid a bad apple, it will be worth it!

It is worth it to look for the “good apples” and to have high standards for your investors.

Good investors can contribute so much beyond capital to helping a startup achieve success! In my mind, besides capital, good investors are thoughtful, supportive, encouraging, well-connected, insightful, and straight-shooters. They communicate well and have high integrity — although remember that they have different interests. They are out there – and spending the effort to find them is worth it. Good reputations also matter–and those with them are typically well-known in the community.