“The purest treasure mortal times can afford is a spotless reputation.” –William Shakespeare.
I firmly believe that your personal reputation, as well as your company’s reputation, is your most valuable asset. It enables you to attract and retain the right customers, best people, and good investors. That’s why you should vigilantly protect it and continuously work on building it.
“The way to a good reputation is to endeavor to be what you desire to appear.” – Socrates.
This is true for any company. In particular, startup companies face many critical dilemmas, especially in the early stages. One dilemma is which investment offers to accept?
Sometimes it’s best to walk away
This is a tough dilemma since early-stage startups are in a constant survival mode. They find themselves continuously in a need to raise funding in order to survive and move forward to the next stage in their lifecycle.
Startup founders and CEOs spend a significant amount of their time searching for the right investors, building relationships, and pitching their ideas and plans. This is often an exhausting and frustrating effort.
That is why they find it hard to turn down an investment offer. They know they need the money. They know how hard they have worked to finally get an offer, and how long it might take, and challenging it might be to get another one.
And yet, sometimes “No, thank you” is the right answer. Sometimes it’s best to walk away from an investment offer in order to preserve your reputation. Some call it “bad money”. I also call it a “toxic investor”.
Beware of a “Toxic Investor”
A “toxic investor” is one that brings with him a high risk of a bad reputation. Such an investor may give you the money you are asking for, even at a good valuation. However, they are a long-term threat to your company and its future success. They drive away good and reputable investors, both in the current round, as well as in future rounds of funding. They tarnish the reputation of the company and its leadership team.
A “toxic investor” may be an investor that has gotten a bad reputation because of the way they deal and cooperate with other investors. Another reason might be that they sabotage the company’s decision making process, or use other bad practices.
Worst yet, sometimes their bad reputation comes from actual illegal activities (money laundering, SEC violations), or a suspect source of money (illegal businesses).
Whatever the reason for their bad reputation, they should be avoided like the plague. I would like to offer the following tips for avoiding a “toxic investor”.
- Do your own due diligence – This can be as simple as a search on Google for any information related to the investor. Also, talk to fellow entrepreneurs, or other investors to learn what is their perception and experience with this investor.
Try to learn about the sources of their funds. What is their typical investment amount and stage? Do they have any other investment partners? What is their decision making process, and style?
- Check references – In many cases, investment firms or VCs will have a list of their portfolio companies on their website. Contact those you’re familiar with, and trust, and ask about their experience with the investor.
Check for the things that matter most to you and your company. If the investor has no list of companies he has invested in, politely ask for references. It’s a legitimate professional request, no different than when hiring a key employee to your company.
- Listen to your instincts and gut feelings – They are usually right.
Bottom line, if there are any red flags the right decision is to simply walk away and look for another investor. The opportunity cost should not concern you. Your reputation is more valuable than money.
Benjamin Franklin once said: “It takes many good deeds to build a good reputation, and only one bad one to lose it
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