As an entrepreneur or CEO, it can be hard to distinguish between a savvy investor and a predatory investor. While both provide capital in exchange for a return on their investment, savvy investors also provide support regardless of market condition. Conversely, predatory investors mainly seek to take advantage of companies and founders during rough markets or strain in business development and add little, or no support.
Of course, accepting terms from either investor-type, especially in a down market, is uncomfortable for any founder; however, more often than not, the savvy investor is the better financial partner—supportive of the entrepreneur’s vision and a champion of the company’s journey.
Both as an entrepreneur, and with over two decades of experience working with Venture Capital and Private Equity Firms engaging in dozens of global transactions totaling over $9 billion, I have had my fair share of interactions with both types of investors. Yet, even with years of experience, it can still be hard to tell the difference. So, what are the signs? How can you spot the predatory investors early?
● Take nothing at face value. Firm associates are ultimately salespeople.
The job of a firm associate—just like any other salesperson—is to assess you as an opportunity and convince you of the value their firm can bring. Most have limited (if any) experience or understanding of how business runs in the real world. For many of them, their job consists of making calls and entering numbers into investment models.
● Do your research before investing your time with the firm’s next level of decision makers.
Do not rely on the firm’s website—I have seen firms publish everything from aspirational nonsense, to misleading information, to out-right lies in their collateral. Talk to people about the firm’s reputation and investigate their recent investments. Do NOT fall for the “we are very private investors and don’t publish much,” line either; any credible firm should be able to provide you with substantial information. If they don’t, check third party websites like EDGAR to view their filings for past investments.
● Once you engage with a firm, do research on the Principal/Partner/Director you will be working with.
That individual is as important as the firm (if not more!). Do your research. Talk to the CEOs and company founders listed on his/her portfolio. Even better, talk to ones that did not take money or have exited. Research the different Board’s that individual sits on; what value do they bring to each company?
● The only thing that matters is what’s written on paper.
An investment is foremost, a financial transaction; everything should be quantified, clarified and transparent. Nothing should be taken on good faith or assumed. Take, for example, the overused promise: “our firm’s network and connections provide additional value.” If the firm’s “network and connections” is a reason for the investor to ask for additional considerations, like warrants of preferential terms, ask them to quantify how much value their network will provide and make those metrics triggers in the documents. Empty statements like the above, usually turn out to be nothing more than an expensive con job on the entrepreneur.
● Before you sign anything, make sure your attorney explains the upside and the downside of the agreement.
I can’t count the number of times I’ve heard the expression “we really don’t need to worry about this clause; it’s a worst-case scenario—it’ll never happen.” One of the key differences between a predatory and a savvy investor, is that predatory investors will often create a worst-case scenario to their advantage, whereas the savvy investor will try to find ways to support the entrepreneur and avoid the worst-case scenario.
Selecting an investment partner doesn’t have to be daunting; remember these guidelines when assessing potential financial partners.
I serve as a board member for The Tampa Bay Wave and The Lowth Entrepreneurship Center at the University of Tampa. The advice shared in this article is a preview to the council I provide to entrepreneurs, founders, and clients I’ve worked with over the past three decades. Feel free to contact me with any additional questions or business inquiries.