Doing diligence and using it for yourself

I have witnessed this a few times where companies go and pitch investors who are really not interested in investing but looking to do diligence for their other investment.  I have seen this from investors and from accelerators and incubators.  Then soon after the company is turned down the company finds out that the business that they flagged to the investor or accelerator as a possible conflict goes out and starts doing things that are in their business model.  In the incubator they do it themselves if the founders don’t like their terms after multiple open conversations.

This is the type of behavior that nobody talks about.  It is almost as bad as the many stories I have heard of inappropriate comments to women from male investors.  It is bad business and when I hear about those people I take note.  I figure what goes around comes around.  I have thought many times of calling those people out on the mat so that other founders can be aware of what might happen when they walk in the door but I have chosen to keep the information in my head for the times that people call me on diligence about the investor/accelerator/incubator.

Honesty is always the best policy.  Certainly if an investor is looking into an arena to invest in then talking to as many companies in a space makes sense but to already make an investment and then try and look behind the curtain into another company to use for their own agenda is not ok.  It is the same for incubators who then decide they know enough to do it themselves.

Certainly the companies that ended up not with those investors/accelerators or incubators probably dodged a bullet.  Not sure I’d want to be in bed with those people.  Bottom line is we all have to get up every morning and look at ourselves in the mirror and it never ceases to amaze me how people who do this sort of thing can just soldier on as if this is proper behavior.

Comments (Archived):

  1. Susan Rubinsky

    My business mantra is, “Good work begets good work.” Stick with it and it will serve you well.Calling out noxious behavior in any industry is important to elevating that industry. Obviously, telling truth to power can have it’s downfalls. But I’ve never been able to bury the truth. I’m just not capable of it. I do, however, hold on to the truth sometimes so that I can tell it in the right way to the right person at the right time so it can have greater impact. Knowing how to do that effectively is hard, and sometimes your fail at doing it properly. #LifeLessonsUnfortunately, we are now living in a political climate where nefarious behavior is being rewarded. This is going to have long term negative impact on our country in both big and small ways. Staying true to values is going to be the test that wins in the long run, but we’ll have to take short term hits and falls. Maybe this climate will bring out the best in people too.

    1. Gotham Gal

      Great mantra…and agree on the climate of lies in this country. It seeps downward.

    2. LE

      Unfortunately, we are now living in a political climate where nefarious behavior is being rewarded. This is going to have long term negative impact on our country in both big and small ways.I would have to agree. And there is little doubt that examples at any level (of risk taken, consequences and reward) put ideas into the heads of people on the way up. And especially at this level.

      1. Susan Rubinsky

        I wish I knew ways to change it. I have been grappling with this. For now, I’m sticking to my “good” mantra.

    3. JLM

      .I like your philosophy and wish it were true.”The meek shall inherit the Earth, but not until the Bold use the Hell out of it and steal all the gold and diamonds.”We are in an era of messaging, but beneath it all is basic blocking and tackling.Knowing how we might differ on politics — though, I absolutely sense you coming around to my view — I can say that it appears that the winner in the recent presidential election had the right message (for the base and swing votes) but he out worked his opponent like a rented mule.It is hard to believe that anyone could out work anyone else in the age of charted aircraft, leased limos, catering, and advance persons.Nonetheless, the winner was the person who got up early, stayed late, worked hard, and pounded it out. That makes me feel great — cause effort won.JLMwww.themusingsofthebigredca…

      1. Susan Rubinsky

        My good work mantra has gotten me a lot of good work and has served my consulting business very, very well. And, of course, I’ve put in a lot of hard work.The current president, obviously, had a brilliant strategy to win. However, I don’t subscribe to his way of doing business. Nor do I think I need to. I’m meeting my goals, on my terms. I don’t often partake in blocking and tackling situations. I walk away from those. Those kinds of clients/projects aren’t ready for someone like me, nor are they worth my time.

        1. JLM

          .Not picking a fight with you, but you engage in the most basic blocking and tackling imaginable — you work hard.JLMwww.themusingsofthebigredca…

          1. Susan Rubinsky

            LOL.You’re part of my Buddhist practice. Engage with what makes you uncomfortable. There are many reasons for the lessons I consciously engage in. Some are:The mind stays closed if you don’t have a dialogue with those you disagree with.Change is not possible if you don’t listen and try to truly understand those you don’t agree with.Put yourself in situations that make you feel uncomfortable to learn more about your own resistance points. The more you learn about your own resistance points, the more you learn about how to unlock them and/or you learn new ways to move around the resistance points.This is something that in Buddhist slang is sometimes called “heightened neurosis.”Sounds crazy, but this is the path to awakening.

          2. Susan Rubinsky

            Well, one of the paths. There are multiple paths. I like to walk on many paths.

          3. JLM

            .It is only when we get out of our own echo chambers that we learn anything. Otherwise, we could just talk to the mirror.I am truly amazed at the number of people I know — good, wickedly smart people — who are literally afraid of exposing their own views to a bit of critical assessment.Worse, when challenged they grab their toys and go home. They are unable to engage in hearty debate and, yet, they pretend to be so open minded and certain of things.When ideas wrestle, better, stronger ideas are the result.JLMwww.themusingsofthebigredca…

          4. Susan Rubinsky

            I wholeheartedly agree. I have those friends too. I’m not afraid to be wrong. I think that because of that, I’m not afraid of putting myself and my ideas out there.I have said this before, but I think everyone should take art classes (or, creative writing workshops are good too), even if you suck at art. There is nothing more rewarding than the critique — by both peers and the teacher/mentor. You learn where you are being successful and where you are not and this helps you see ways of improving.

          5. JLM

            .I am a writer and have had several short stories published, but my favorite thing is to go to writer critique sessions and see the faces of people who provide the critique. Some of them are brutal, which I actually like more than others. I have never had my work critiqued where I did not improve it with the re-write.In some ways that is the story of life — constant re-writes.JLMwww.themusingsofthebigredca…

          6. Susan Rubinsky

            I can’t stand the people who just compliment your writing in workshops. It’s not helpful in any way.

  2. Nicole Hamilton

    Have had this happen. Pitched a west coast VC who was very enthusiastic and arranged immediate second call w/partners. End of second meeting, told me they had an investment going into our space and wouldn’t be pursuing. Which they clearly knew from the beginning. It’s quite common, this type of intelligence gathering. Especially if you are in a space VCs aren’t familiar with, and they think the space might have potential. Really, the best intelligence is from companies already making headway in the space, but it is highly unethical and reputation damaging. You better believe I told every entrepreneur I knew to avoid this VC!

    1. Gotham Gal

      I am keeping notes….

    2. Susan Rubinsky

      Good for you on transparency! Sorry you had it happen though. In the end, good wins.

    3. LE

      I don’t think that VC’s or investors in particular are any less honest than other people in business. Which essentially means ‘let the buyer beware’ and to take whatever steps you can to protect yourself. This is something that you learn over time. My point is they operate like people in business do as opposed to how people in medicine do. They have calculated that the reputation hit does not exceed the money gain in short. And of course it’s a matter of degree. Nobody when negotiating can be 100% honest and upfront or they will be taken advantage of.I remember when I started my first business out of college. A somewhat friend of my dad’s met with me and told me he would give me a 25% discount on whatever I bought from him for resale. When I started dealing with him the discount was actually 20%. He just changed it and said ‘sorry can’t make any money at 25%’. I could give you hundreds of examples like that.

      1. JLM

        .We will disagree on this. The VC-Entrepreneur relationship is the old guys v the young guys. [Play with genders as you wish.]In this difference is the makings of a contorted and unhealthy power relationship made all the moreso by a willingness to accept failure at alarmingly high rates.In the end, VCs only warehouse somebody else’s money and do not own the creative driving force of their investments. That belongs to the entrepreneurs.It is only recently that VCs have even had a public reputation.I find that the vast majority of VCs are a bit filled with themselves and, yet, unable to articulate what they bring to the deal other than antiseptic, bloodless money.There are a few exceptions, but not many.JLMwww.themusingsofthebigredca…

        1. LE

          I find that the vast majority of VCs are a bit filled with themselves and, yet, unable to articulate what they bring to the deal other than antiseptic, bloodless money.Let’s assume for a second that that is the case. I don’t think it is but I will go with it to shorten my point. They do bring things to the table most definitely for someone who is right out of college (or is dropping out of college). Obviously. Adult supervision and wisdom as only one example. Connections. And resources. Know that for a fact.In any case:a) Who cares if they are filled with themselves. Not me. b) Don’t take their money and then you can own 100% of nothing that nobody cares about as opposed to a smaller percent of something that perhaps someone will care about. Because you will have money to take chances and experiment that you wouldn’t have if you were running a lean operation without the extra cash. c) Even if you end up with nothing as a result of ‘b’ you then have a stamp of approval as someone who is able to produce unless you spectacularly screw up. Better to have loved and lost than to never have loved at all. Go onto the next thing you are a player and you are known.d) Many ideas that vc’s put money into are laughed at by traditional people in business as total longshots. Your uncle and your dad won’t fund it even if they had the money. And if they did, see ‘e’.e) No expectation of payback no security and no need to avoid and explain to family who took a flyer on you and then you failed. Big advantage.In the end, VCs only warehouse somebody else’s moneyThat’s a very very big ‘only’!

          1. JLM

            .Think you wandered off the game board, LE.I was speaking to the issue of their honesty as noted in the blog post, not the overall utility of venture capital.The simple fact that venture capital exists is an endorsement of almost all that you note, but still doesn’t absolve them of a clear ethical and moral mine field.They are like pay day lenders — useful to a class of folks who cannot obtain capital through other more “normal” channels.JLMwww.themusingsofthebigredca…

  3. LE

    I have witnessed this a few times where companies go and pitch investors who are really not interested in investing but looking to do diligence for their other investment. In real estate leasing it is not uncommon at all for potential tenants to tell you they are interested in leasing space when all they are doing is gathering information to better be able to negotiate with their current landlord. They will have no issue with wasting your time (or the time of a realtor) in order to further their other business interests. (And these are medical tenants, doctors by the way). They have no plans to actually occupy any space.I had one existing medical tenant who told me they wouldn’t be renewing their lease. That they loved the space and that the issue was they had lost a few doctors and would close in the area (was a group that practiced all over the state). As a result of what seemed like a reasonable request I allowed them to stay an extra month or two w/o paying a premium to do so. They moved out and ended up opening up about a mile away in a new office and were actually expanding.

  4. Pranay Srinivasan

    Maybe a confidential sneak peek at that list for GGV founders?

  5. pointsnfigures

    Have seen this happen. Funny instance. Was talking to an entrepreneur about a term sheet. Asked if the VC put in a non-compete for themselves along with the non-competes they wanted mgmt to sign.

  6. JLM

    .If one has not had this happen, then the operative word is YET.Every entrepreneur pitching a deal should try to get the VC to sign a Non Disclosure Agreement. Most VCs won’t and they have complicated, bullshitty reasons why they won’t. Still, it means something. [When a VC is on the board of a company going to the pay window, NDAs will be signed and flow like Niagara Falls.]When putting together a pitch deck, put the following words on the front in RED — PRESENTATION CONTAINS PROPRIETARY, CONFIDENTIAL, TRADE SECRET INFORMATION. On the last page, put two paragraphs saying the same thing. Number the presentations and identify “4/20 for ABC Ventures.”Create a trail of breadcrumbs back to the VC.No VC will object to that, but it has legal meaning. [Let’s not pretend that entrepreneurs are going to sue VCs. That is NOT going to happen.]It may give someone pause to just hit SEND and email your presentation to their portfolio company.Also ask every VC BEFORE showing up — “Do y’all have any investments in this industry/space, etc?” Give them a chance to come clean. Then, investigate those companies and see if they present a real, clear & present danger. Do not pitch to VCs when you smell a conflict. Do not play with gasoline and matches. Do not play with loaded guns. Be your own best friend.What you are hoping for is that this approach will awaken a long dormant bit of ethics or morality trapped within the VCs with whom you are dealing. It is a long shot, but it may be your only shot.I have a very optimistic view of the character of man which conflicts totally with the 35+ years of experience whispering to me, “You are an idiot. They cannot be trusted. Ever.”JLMwww.themusingsofthebigredca…

  7. John Luke

    What could be a possible solution for this kind of problem? Is it—don’t get into detail when pitching your idea? There’s so many things happening in a startup market—why should they steal exactly mine? I don’t like to answer my own questions in the same message but want to create a small conversation here—I see it is worth only if you see the traction startup gets. Would you agree?

    1. Gotham Gal

      There is a fine line between being open about what you are building to get an investor on board and holding your cards close enough that you don’t give away everything. Investors are not going to build your business but it appears that some of them are happy to pick one horse and share everything they have seen.Not sure that there is a solution here. NDA’s are bullshit and you would hope that the person on the other side of the table would have morals. Doing diligence on who you are talking to would be a start.

      1. John Luke

        offtop: I see the only way right now to notify you about the bug is here—your blog has two different disqus threads per post—one for http:// and one for https://. If you could change all the blog post links to use https—it would solve the problem. I’ve just noticed that there’s a lot more comments on https version of this post. You can ping me on slack/email if there’s a question how to make it proper way. Also thanks for sharing experience—it’s has a lot of value for me.

        1. Gotham Gal

          weird. let me look into that.