Investor shenanigans
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Investor shenanigans
What happened when we let founders anonymously vent about investors
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Hello there,
This August we’re shining a light on parts of the early-stage UK startup ecosystem that often don’t get written about.
So far we’ve looked at dealmakers and pre-seed due diligence. Today, we look at a sensitive topic. How founders feel about investors and the fundraising experience.
If you’re an investor (and there are plenty who read PreSeed Now!) you might find today’s edition painful reading. But as we gear up to resume our twice-weekly profiles of startups at the beginning of September, think of this as a useful palate-cleanser.
I’d love to hear from investors with their thoughts on what founders have to say in today’s edition. Please feel free to drop me a line with your thoughts.
But first:
Hello if you discovered us via Tech.eu’s syndication of last week’s due diligence piece. It was good to get a byline over there after years as a reader.
Don’t forget, paying subscribers to PreSeed Now not only get the full versions of all our startup profiles, they get access to our Startup Tracker. It keeps you informed about the progress of 100+ early-stage B2B and deep tech startups across the UK.
– Martin
What happened when we let founders anonymously vent about investors
Over the years, far too many founders have quietly shared stories with me about how an investor screwed them over.
These tales generally don’t become widely known, because founders don’t want to rock the boat too much. And for anyone not directly involved in the deal, it’s impossible to know which specific stories are simply a result of crossed wires or sour grapes, and which are genuinely bad behaviour.
Earlier this year PreSeed Now held a round-table event in which we heard about how 2023 is very much an investor’s market as funding activity slows down across the board.
While there will always be some investors who take advantage of startups, is founder-unfriendly behaviour on the rise in a market where startups often have fewer funding options?
It’s difficult to say for sure, but anecdotally, we’re hearing about increasing numbers really harsh term sheets out there at the moment. From our experience here at PreSeed Now, it seems like antics that had been on the decline pre-Covid are now truly back in play.
One example we’ve heard from a number of different people: some investors wanting to give themselves 60- or 90-day cooling off periods. If they decide to walk away, they keep their money and [get ready… this is wild…] rights to the startup’s IP. Seriously.
That’s just one particularly bad story that–while we haven’t seen a term sheet to confirm it–has come up in a number of conversations lately and sets the tone for how some founders feel about the current investment landscape.
And it came up again when I contacted a bunch of founders and gave them the opportunity to vent about current and recent fundraising.
A quick note about valuations
Before we dive in, it’s important to note that one area where investors can legitimately become more hard-line in today’s economy is around startup valuations.
As Rupert Wingate-Saul, who runs Founder Funding Groups to help startups raise, told me:
“Valuation of all of these businesses is typically very subjective, and it's in the eye of the beholder. The founders have one view, and the investors often have another.
“There are of course levels below which that negotiation is harmful, at the point they're taking up such a chunk on the cap table that it makes it difficult for the business to raise any follow on funding. But assuming you stay above those levels, I think negotiation on prices is certainly the investors right and, and is often healthy.”
So valuations are one thing, but let’s look beyond that and see what founders have to say about the broader fundraising experience.
All quotes below are from early-stage startup founders who are either raising or have recently raised funding; often their first round.
We’ve given them anonymity so they can speak freely. Some of the quotes have been paraphrased for clarity or to better obscure the founder’s identity.
Poor communication
“Most investors won't say no to a team they don't like. They'll often string founders along in case they get interest from other funds - herd mentality is strong in investors, and any signal that another fund is interested often triggers interest from others. Until then, investors don't like to rule anyone out.”
“One firm told us they’d take us to their IC [investment committee] and then stopped communicating. We chased and chased. They apologised and then started ghosting us again.”
“We've had multiple meetings and calls with investors, sometimes they've been exceptional discussions - where despite us following up, we never hear from them again.”
“They ask you for every single piece of information… but then when it comes to their processes, and who sits on their investment committee how you're being moved forward, and what criteria you're being judged on, they’re completely opaque. As a founder, you should have access to that information; you should be told how that investment committee works. Does it have to be a unanimous decision? Does it have to be 75%? Is there a second round of discussions? If you’re a first time founder, you don't even know what an investment committee is.”
“Pro-tip: if an investor ends the first call by telling you they have a weekly internal meeting in which they'll talk to their wider team about you, that's shorthand for a ‘no’; they don't have nearly enough information to risk their credibility by floating you as an investment opportunity - expect a rejection email shortly after.”
Wasting founders’ time
Linked to the communications issue is a sense from founders that they’re often strung along unnecessarily.
“One firm rejected us based on our deck because we didn’t fit their criteria, even though we thought we were a good fit. They then saw us pitch at an event and decided they were interested and we were a good fit after all. They invited us to a meeting, soon after which they rejected us for the same reason as they did the first time.”
A firm got in touch. They seemed like a great fit. After several conversations they apologised and explained they weren’t making any new investments at the moment.
“We've seen multiple instances of investors, often partners, reaching out to us for a call but turning up unprepared. In one instance, a partner at an established fund received six months of updates from us before we scheduled a call, and received our deck the week before - and joined the call having read none of it.”
“I can understand VCs can't be subject matter experts in everything, but they shouldn’t pretend to be an expert by saying that there's no market for something when they don’t understand the market.”
“For about six months an investor asked for more and more information, dragging out the process. And then they turned around and said no. All that work and distraction, for nothing.”
“Your job is to say yes or no. That's your entire job. There's a way to say no, and dragging a founder out for months is giving them a false positive.”
“I know a founder who negotiated a good deal with an investor. But when the legal documents came through, the investor’s lawyers had drafted terms that were nothing like what was agreed. The founder's lawyers pointed out the discrepancy and the investor’s lawyer indicated they didn’t care.”
“The main issue right now is that no one is moving, they’re all too risk averse and precious but instead of being professional and adult, everyone’s being busy to be busy; this is taking up people’s time and energy and progressing businesses backwards, not forwards.”
How FOMO hurts founders
Related to the time-wasting issue is FOMO. Fear Of Missing Out on deals comes through in all sorts of investor behaviour. For example:
“Associates are often hired by funds to do the equivalent of cold outreach; their job is to fill a CRM with companies and perhaps perform a first pass. They need to see everything that fits their investment thesis. Rejecting a startup that later goes on to be successful is one thing, but if they were never in the CRM in the first place, then the associate hasn't done their job properly. That leads to plenty of ‘spray and pray’ LinkedIn messages and emails from funds that get novice founders excited but will never lead to anything.”
“…but it’s not just associates. I was recently approached by a partner in a European fund who was ‘super-excited’ by our team and what we were doing, even though we didn't fit their investment thesis in any way. When I said I was reluctant to waste time booking a call and sending a deck, they told me we absolutely did fit, 100%, and we absolutely had to talk. So I scheduled a call and sent a deck, and within an hour the investor cancelled the call - because we weren't a great fit. Our deck was now in their CRM, so the investor had done their job.”
“Some investors tell you to ‘stop fundraising until we've talked!’ Please don't stop fundraising.”
“One investor spent a month making us having conversations with different people that they wanted us to speak to. And then in the end we found out that it was already a no at the beginning. So why put us through it? Why are you putting us through processes that you are trying to turn a no into a yes, but it's always going to be a no, isn't it?”
Diversity
A number of founders we spoke to signposted sexism, which aside from being unprofessional, also signals a shortsighted view of what makes a good deal.
This one isn’t a direct quote, but I heard from a few female founders that they felt some male investors from an operating background had a condescending “well done you for getting so far” attitude while seemingly lacking faith in female founders. As one founder put it: “the behaviour is widespread – condescending and patronising, and time wasting, and particularly if the startup is not led by white middle-class men.”
“My co-founder has received very different treatment to me - the only significant difference between us is that she's a woman. VCs have often dismissed her domain experience as ‘wrong’, insisting that what they think trumps what she knows and has done. This isn't isolated, unfortunately, and isn't necessarily behaviour reserved for male investors.”
“Some investors manipulate and skew the data to make it look like they're more diverse than they are. They’ll say a percentage of their portfolio are female founders - but they didn't give them that same percentage of the cash from their fund, and some of those startups are co-founded with men. It’s like greenwashing; it’s diversity-washing.”
“I was told straight out that female solo founders are not going to get investment.” [You could argue that solo founders are more risky than founding teams, but female solo founders shouldn’t be more of a risk than their male counterparts]
So, what next?
While a lot of what founders say above is sadly not new, there’s a sense that things should change.
“It shouldn't be the unwritten rule that a funding round is the most exhausting, hardest thing that you'll ever do. That should be revenue, growth, and building your team. It shouldn't be trying to prove all of that to a group of people who don't even understand your market. Founders talk to each other. In different industries, different stages, different locations… we all feel the same.”
“Investors should be aware that there are a number of very active founder groups and forums operating in London and across the UK. One of the largest is operated by Landscape, it's called Anonymous Founders. The founders will often name and shame funds and angels for poor behaviour, so investors shouldn't think they can continue unchecked; good founders pay attention and keep lists of questionable VCs based on these communities.”
Not ALL investors…
I should point out that not all investors are like this, and those that are probably explain their behaviour in ways that justify it to themselves - if they’re aware of it at all.
But as you can see from the quotes above, behaviour founders dislike leaves a mark, and while investors hold the power thanks to the funds they have to deploy, word about who messes founders around is increasingly spread around on the grapevine.
Change begins with awareness, and the more we talk about the difference in expectations between founders and investors, the more likely that process will take place. Hey, I’m an optimist - that’s important in tech!
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