In our first post, Strategic Buyer: Beware, our startup founder, Margaux, realized a strategic investor initially showing enthusiasm to invest in her startup used a string along tactic to buy her startup for pennies on the dollar. What are some steps Margaux could have taken to avoid a tragic outcome?
Tips for Avoiding a Strategic Investor String Along:
- Research Potential Investors: Before getting into any conversations about investment, research the potential investor or investment group using a tool like Pitchbook or Crunchbase. Look into their past deals, the companies they’ve invested in, and any possible red flags from other entrepreneurs. Are they investing in any competitive products? Look for any mutual LinkedIn connections, reach out and do your due diligence.
- Diversify Investment Conversations: Never rely solely on one investor or one conversation. Always be in talks with multiple parties. This provides backup options and can give you leverage in negotiations.
- Beware of Over-Promising: If something sounds too good to be true, approach it cautiously. While some investors might see the genuine potential in your product, others might have ulterior motives.
- Document Everything: Ensure all conversations, especially ones involving promises or numbers, are documented. This keeps everyone accountable and serves as a reference if any discrepancies arise.
- Don’t Over-Extend Based on Promises: Until money is in the bank, avoid making large financial commitments or plans based on promised investments. Many founders fall into the trap of ordering materials or hiring before the check has arrived, only for the funds to be stuck in China…perpetually.
- Be Ready to Pivot or Wind Down: Entrepreneurship is uncertain. Always have a contingency plan. In situations where funding falls through, knowing how to wind down or pivot the company can minimize losses efficiently.
- Trust Your Instincts: If something feels off about a deal or a conversation, trust your gut. Taking a step back to reassess can save a lot of trouble down the road. Call a few mentors, and do your due diligence on the person – it doesn’t hurt to message a few mutual LinkedIn contacts (especially founders they’ve worked with) and find out more about their negotiation style.
At Ravix Group, we often work with strategic investors and they know when one of our financial experts are involved, the stringalong is successfully avoided.