First you give but suddenly you take away.
I have been investing now for over a decade. I have learned an incredible amount and I am still learning. Each company has a different life, the documents are key and the price is extremely important. The other important factor, that might be the most important factor, is behaving as an investor.
Whether we want to believe it, our reputations as investors, all proceeds us. It doesn’t take much diligence to find out about an investor. The lion share of investors in the start-up world are big ventures funds, micro-venture funds, and angel investors like myself. Each of us involves ourselves differently, have a different thesis and are interested in different categories.
Recently I have seen some behavior that is reprehensible mostly from micro-VC’s. I spoke to someone else about this recently, who sees more deals than most anyone I know, and he is seeing the same thing in almost 25% of the investments that come across his table. Micro-VC’s committing capital to a company, that is documented (not just a handshake or a conversation) and sometimes even signed legal documents, and then about a week later they change their mind and decide they won’t commit to anything.
This happened to a deal I am invested in. The micro-VC signed the legal documents for $1.5m and then decided that they changed their minds and could possibly (and that was a big not sure) come with $250K. That behavior has fucked the company because there really wasn’t anyone else at the table to cover that amount. The VC who was already invested came in, did a down round, got everyone to pony up more cash, but the company is still reeling from that hole of cash that was supposed to be a hefty infusion. They are still short. This is when the value of a major institutional investor really makes a difference.
I have heard of another where $250K was committed, then it went to $1m and then a week later went to zero but they would consider $100K. Can you imagine how the founders felt in both of these deals? There are highs and lows in building a company but this is a whole other ball game.
I have not publicly outed the micro-VC who screwed the company I am invested in although I have certainly mentioned their name to others as I have heard about other bad behavior from that group. I believe what goes around, comes around. This type of behavior needs to be called out, it is not the type of reputation that should be tolerated in the start-up community.
Comments (Archived):
Joanne, thank you for shining the light on this important bad behavior in our industry. This is NOT okay, and unfortunately, we are seeing a surge of it. Founders need to be extra vigilant, and know that the rounds aren’t done until they are done. More importantly, people should not be committing lightly, commit is a commit as the word implies.
Agree. Commit means Commit.
I’d really like to know more! Will message you and GG.
.It will not change until people with intimate and accurate knowledge name names.This screams out for the use of an ancient technique — the issuance of letters of credit at the time of commitment.This is an actionable offense when properly documented. The entrepreneur should ensure the commitment docs include the phrase: “binding commitment” and the entrepreneur is “relying” upon this binding commitment to take subsequent actions, including refusing investments from others.It is not a bad idea to write a “binding arbitration” clause into the dispute resolution provision of a commitment letter.JLMwww.themusingsofthebigredca…
They were binding docs. Law suits are costly
.Fair play to you.Shows why the LC and binding arbitration provisions might be useful.We need to get to the “loser pays” theory and contract docs need to insert this until then.JLMwww.themusingsofthebigredca…
Maybe there should be an insurance policy that you can take out in the case of investment falling through…?
Many VC funds out there we founders tell others NOT to trust.OTOH lots of investors who don’t quit on their founders. Am grateful for those.
I love how you stand up for what is right. Thank you. I, too, believe that what comes around goes around. In this case, word-in-the-street gossip would serve a very useful purpose. I hope it circulates sooner than later.
Joanne, what *practical* advice would you give a founder like me to make sure this red flag comes up in my investor diligence?I generally look through the investor’s PortCo’s (on website/AL/Crunchbase), and find a company I know to ask about that investor. But there is survivor ship bias here…only companies that secured the investment are on the website.Further, I generally hunt down that investor’s LinkedIn and look for common connections. This can lead to more authentic feedback, but not necessarily.Any other methods you would suggest? Assume I’m modestly “plugged in” to the NYC startup ecosystem.
Ask around. Make sure they are legit. People are chatty. See how they are as investors to the firms they have invested in, how they did their diligence, how they committed, etc.
always ask what an investor was like when things were going poorly. you find out people’s true colors when things go bad. Also, investors should be quick with a no and give a clear reason why. you might not agree with them, but don’t try to persuade them.
Not just micro-VC’s. Some very large Sand Hill firms are doing this frequently as well. Industry has changed a lot (some for the better) over the 25 years I’ve been investing and raising capital.
Investors agreeing to invest and then pulling out is like the couple in the restaurant that tastes the wine and says “oh I don’t like this one”. The point of letting you taste the wine is just to tell if it’s corked, not to give you an opportunity to see if you like it or not. The cork is already out of the bottle and you just burned a perfectly good bottle of wine. By all means if in due diligence you find something rotten, it’s your right to pull out of the investment. Otherwise there is very little that serves as an acceptable excuse for reneging on agreed terms.
100% agree with Joanne that this sort of behavior is bullshit. I had a guy bounce a check to a startup when he committed for $350K once. He even took a photo of himself depositing the money at an ATM, and sent a fake Fed Wire number. I picked up the pieces and it’s cost me over six figures so far. I didn’t have to do it, but felt some responsibility and it has really hurt my individual track record as an investor. I was also afraid of besmirching my reputation. When you are in a deal with a schmuck, it can rub off if you are not careful.I was an angel in a deal that had a firm raising a succeeding round. A VC pulled out 2 days before the deal closed and screwed the whole thing up.When I was on the trading floor we were a closed community. Your word was your bond. When some one was a tool, we called them out by name. If it happened over and over again, we ran them out. No one would trade with them.I was initially shocked that this sort of thing happened. When I commit, I say how much for and I am in-unless there are extreme extenuating circumstances. But, once you commit you better follow through. If you are an investor that is wavering, don’t let it be a surprise. Communicate. There is no shame in pulling back if you do it quickly and clearly and give an honest reason why. But don’t do it when the deal is in its final phase. And don’t hide in a grey area. This stuff is black and white.The investor community as Joanne cites is small, but it’s not as closed as the old trading floor. I understand why Joanne hasn’t publicly outed them-and I wonder if we should change our norms about it. The problem is there could be legal repercussions.If the deal was right and the timing right, I’d love to have Joanne as a co-investor. Stand up people are sometimes hard to find, and good to find.
thank you!i have always liked the saying…when you lie down with dogs, you get up with fleas.
“I picked up the pieces and it’s cost me over six figures so far. I didn’t have to do it, but felt some responsibility…”The world needs more people like you, principled. For when it comes to money, too many believe that its OK, if it is not illegal. Some go further and make the previously illegal, legal. Thank you for doing the right thing.I had an attorney once, the very best I could find, who worked years on our case, reflected by the file size equal to a stack of Manhattan phone books that rose from my elbow to my wrist on his desk, or so I thought. We never gave him a retainer and he had yet to send us a bill.Over the years, we had developed a great relationship and spent quite a bit of time talking in his office about all kinds of things. As he waxed nostalgic about the case and hit the key points in its history, my internal calculator was spinning like the price numbers on a 1973 gas pump, sweat beginning to form all over. For as he spoke, I saw the hours, turn into days, days into weeks and the weeks into months in my mind. What was billable? Probably most of it.He noticed and stopped talking and just looked at me. Then he said, “Are you feeling OK? Because you look kind of pale and sweaty.”I brushed it off and made a comment about the file size. Then he said, “Oh that, that’s just the current office file… the rest is in storage.””Storage?” “Yea, Had to rent one of those lockers.””Lockers?” My chest began to burn. For he had yet to tell me about the final result of our case. It was a somewhat complicated case and time had eroded some of its value and we never really covered the money thing clearly…Then he said what I was thinking, “We never really discussed money did we? That’s my fault, I should have done that up front. The bar requires that the Attorney and Client both understand what’s expected and reduce that to writing. I failed to do that and as a result, I am not going to charge you”(Mental whiplash) Bottom line, we paid him $1000.00 and covered his bar tab for a couple of years at a bar down the street.About a year later, at said bar, he confessed that the case was personal for him and had something to do with the other attorney that made the whole thing a thrill for him.He went on to become a superior court judge, then appellate. I will never forget they way he treated us.
wow. that’s an amazing story.
This is spot on! I searched for an external investor to “take the next step”. Found one Investor that where stoked to be a part of the project. Money is not an issue for “you” anymore they said… Interest for our products has been great. New markets opened. Sales has been good. Then money was needed for production of the sold products. Investor backs out… Years of hard work, down the drain…. But if it doesn’t kill you, it will harden you. Still alive 😀
Bravo! You give me hope for a better America. Thank you for sharing.