Not All Money, is Good Money

Not all money, is good money

Finding the right investment partners for your AI Longevity unicorn

It always starts out the same way, a couple of guys come up with an idea to change the world (disrupt a space) from their dorm rooms at some US college. They start coding, put together a beta platform and boot strap through friends and family to test a product out in the market. If they’re lucky along the way, they find an influencer that gets their product out on social media.

They give the product away for free in exchange for feedback from their first 100 customers. Make tweaks to the platform and set out to raise seed funding. (Here’s where it gets interesting…). They’ve never raised before. Never created a pitch deck w financials. To them, all money is good money! If they could just get that $5mm they can build out their engineering team and go to market…for all too important Product Market Fit. PMF. (No PMF. No Series A.)

Buyer beware. I’m skipping a bunch of steps for brevity and general lack of attention span from most readers but per my usual MO, here’s a small list of what young and old..founders should be on the look out for when giving typically 20% of their NewCo away for $5mm in seed followed by $25mm in Series A…and $150mm in Series B.

1. Even if you are 2-10 employees in a Chinese knock-off We Work, you have developed a culture for your NewCo. Namely, it’s shaped based on your personalities as co-founders. That culture is central to your success. When fundraising, do your due diligence on the VC or PE firm writing you that $5mm check. Who are they? When they take a seat on your advisory board how do they behave? Can you see yourself working with these guys on operational objectives? Are they actively involved or passively investing? What’s their investment timeline and horizon?
2. The horror stories are all mostly true, founders that take the money and find themselves on the outside looking in. Didn’t negotiate the right out clauses, weren’t in control of their product, start to lose the essence of their company with every dollar that comes in from the outside. Eventually, they take their vested founders shares and sit on the side lines waiting for a change of control so they can at least participate in the upside that they so desperately need.
3. Equity partners come in all shapes and sizes. Titanic narcissism is alive and well inside their walls. Groomed at a young age and privileged, they develop sharp elbows at an early age and become quite good at organizational jiu jitsu. It’s easy to spot these types, but difficult to navigate once they are inside your organization. Somewhat autistic, certainly on the spectrum, never one to sit and listen to a story or an in-depth conversation unless their voice is the one that’s being heard above others, regardless of age, they tend to dismiss any and all questions, advice, operational words of wisdom unless it has a tint of their own opinions….typically they become the 700lb gorilla’s in the board room over time.
4. VC’s have portfolios. One out of every 7 companies they invest in actually deliver ROI for their clients. Hence, the other 6 typically fail and/or underperform. While for you as a founder, this is your only play, this is your baby that you put all your blood sweat and tears into, for them, you are merely one of those 7 investments. They hold leverage over you. At all times.
5. Much like them you too are looking for Unicorns. I always tell my clients. Do your homework. Talk to their current portfolio companies. Go buy the founders a drink or lunch (Mache Latte or Green Goddess Salads in Silicon Valley). There are unicorn VC’s out there, it’s all in their personalities of the principals and partners and how they actually behave within the company they invested in. Whether hands on or off, whether deliberate or aloof, I sincerely believe the great VCs out there are but a reflection of the integrity, ethics, & personalities of their partners. It’s not about returns in this game, it’s about character. How you treat others. In a dog eat dog world, one where mothers eat their young, it’s those partners that have true character that set their VCs apart. Ask the founders within their portfolio companies who are struggling, “how do they treat you when things aren’t going well?” Do they dig in or do they find a scapegoat.
6. It’s an old adage but it holds true to this day, when doing business in Silicon Valley or in NYC. Especially in this virtual world we live in today, when you’re out fund raising, look for two key immeasurable characteristics ; 1) When they shake your hand, is it a firm hand shake? 2) Do they look you in the eye when they shake your hand, & can you look into their souls and see substance. Or, is it empty? That will tell you, all you need to know.