A chap I know, mid-40s, just retired after selling his business for multi-millions. He knows I've invested in way-too-many startups so, having never done so himself, asked for advice.
We'll call him John (his real name's Peter 🤥)…
John wanted a second opinion on a fintech deal he’s looking at.
A fintech founder wants John to invest $200,000.
John knows the space well, and is pretty well-known. In the founder's mind, John would make an excellent cornerstone investor.
That's true, for the founder. But not for John.
In my opinion, John cannot possibly lead this deal.
For starters, he has no idea what he's doing.
Not only does he have no clue about valuation and terms, but also more importantly, he could unintentionally become a buying signal to other investors.
It’s bad enough losing your own money, but when others follow your lead it's way worse.
Some more red flags…
- The team will use this raise ($1m) to build the product and complete a single POC. There is no go-to-market plan. 🚩
- They haven't yet spoken with any target customers, besides the POC company (which is owned by one of the founders). 🚩
- They haven't raised money from anyone else. 🚩
- They plan to hire a very senior team from day one, on big salaries. 🚩
- The product concept isn't new - they just intend to do what other firms are doing but better. ("Better" is not a differentiator.) 🚩
Here's what I said:
- Don't do the deal, or do the deal but invest a much smaller sum.
- Don't be the lead investor. Instead, invest once they've closed a more experienced investor or fund, who can negotiate the terms.
- Don't just do one deal. Commit to doing no fewer than 20 deals of similar size (if your pot is $1m, write 20 x $50K cheques); and/or
- Join a syndicate or investing club, so you can benefit from others' experience, opinions and deal flow; and/or
- Diversify your risk by investing in a VC fund (I'm an LP in a great little Singapore-based fund that accepts investments from low six figures); and/or
- Diversify by buying a stake in all current and future DQventures companies. 👀
(OK, I'm biased with no. 6, but John's question coincided with us receiving a term sheet from a VC 🎉, so a select few angels are joining our round.)
Anyway, the point is, just because you've sold a business doesn't mean you know how to invest in them. The fintech founder won't like me much, but I hope I've saved John some potential heartache, and maybe this will be useful to others in a similar predicament.
What did I get wrong?
– Midjourney, not John (who obviously looks a lot happier!)