Thread by @dunkhippo33

Today's Twitter thread is on fake investors. Unfortunately, there are a TON of fake investors out there.

How do you avoid them? What do you do?

Read on >>

1) This thread is inspired by @BigSisTracey -- I'm so sorry this happened! :(

At the same time, unfortunately, this is so common too!! WTF! :(

https://twitter.com/BigSisTracey/status/1460691650322133000?s=20

2) There are a few kinds of fake investors -- ppl who:

-Pretend to be investors to gather info (usually for competitors but sometimes just to learn)
-Have no $$ but wish they did & like to "play investor"
-Are delusional & make commitments they cannot uphold & then renege

3) Avoid all of these! Unfortunately, as a founder, it's easy to end up wasting a TON of time with any and all of these fake investors.

Why? Because fundraising is not easy for most ppl. And these fake investors are always SO ENGAGED. So you want to believe they are real.

4) They feel like your best friend because they are so positive and easy to convince.

But given the state of the world, it's impt to keep your guard up so you don't waste your time (or worse).

5) Let's dig into each of these. There are a ton of investors who like to take mtgs with founders for competitive intelligence or just to learn.

Here's what's ok: an investor meets w/ 3 startups who all do the same thing and invests in 1 of them.

6) Here's what's sketchy: investor invests in a startup. The fund model doesn't allow for investing in a conflicting startup.

But the investor goes ahead and meets w/ all the competition (without disclosing original investment) in order to gather info and fwd it on.

7) This has happened to me before w/ my startup. I was naive and clueless as a founder. There were investors / advisors in a competing company who just met with me to collect info.

Unfortunately, ppl do this all the time!

8) So how can you protect yourself? Ask an investor if they have invested in anything competitive?

And how do they perceive competition in their portfolio?

9) For some funds, it's ok if there are competitive companies in a portfolio.

For funds w/ large portfolios, they don't take Board seats. They have no influence / control of companies. And generally don't really know what's going on. And honestly are too busy to share info.

10) For firms like these, it's like buying both Pepsi and Coke stock as a retail investor.

But for funds who are writing big checks & taking Board Seats - this is more of an issue. Not always, but you should just directly ask if they would even be able to invest in a competitor.

11) Next type of fake investor: Investors who have *no money* but take lots of mtgs w/ founders.

This happens a TON! :( When I was a founder, I ended up taking a lot of mtgs w/ angels who were like this.

What a big waste of time! I was so naive.

12) Unfortunately, these days, this problem is even worse! There are a TON more ppl who want to be angels. AND, there are thousands of new emerging funds!

13) So how do you combat this? As a founder, you should ask how many checks the investor is writing these days. Is the investor even active?

If the investor is an angel, you should make sure they've written at least 1 check before. The greater the cadence of checks, the better.

14) Now, this may seem unfair, because every angel has to start somewhere, but these days, most angels I'm seeing have written their first check via a syndicate on Angellist or in a crowdfunding campaign on Republic. The bar is not high to write a small check into something.

15) If you're mtg an emerging VC fund, let me tell you there are a TON of 1st time funds who are taking mtgs w/ founders.

But they have not yet raised any $$.

They may have good intentions & may aspire to write checks, but the reality is it may take them a LONG time to raise.

16) If a fund has raised NO MONEY, then you shouldn't take that mtg.

We've had portfolio companies sign with firms who had no cash. 6 months later, there's still no cash, but now other firms are willing to invest at a higher valuation.

That's a tough situation.

17) The last group of fake investors is the worst. Not only do they waste your time, but you're often up a creek, because you counted on their money but they reneged.

18) Unfortunately, this happens a lot -- both with startups and funds!

We have startups in our portfolio who had investors commit hundreds of thousands of dollars -- even upwards of a million dollars and renege!

19) I get that circumstances change, but when the rounds are so small to begin with, reneging on large amounts of money relative to the round is honestly sh*tty and poor planning.

20) For funds, you have recourse typically built into your LPA if an LP reneges. You can get rid of that LP, and they lose their full position in the fund incl $$ already contributed.

For startups, unfort it's not usually worth suing over.

21) tl;dr. Founders should ask direct qs of investors:

-are they actively investing?
-how do they think about portfolio conflicts?

If an investor is *overly* excited about you, proceed w caution! Even your best supporters who believe in you, have an ounce of reality.