Investors are people just like you. They have the flaws as anyone else and they need to interact with other investors to close an investment. You may never get the signs in advance, but some of the investors you meet will be extremely unreliable. Some investors have personalities that can be daunting at times, others are highly aggressive, and occasionally you will find some just LIE. They all may mean well. You may not be able to tell the difference but remember investors are like your partners. You are stuck with them after taking their money. If you can afford to run from less than stellar individuals, go elsewhere for the money!
These stories are examples of situations where investor flaws were not recognized in advance. Unfortunately, the aftermaths ranged from displeasure to horrid conditions for the companies. These are summaries of true stories!
Example 1: A company searched for 9 months for investors to back a novel and exciting technology. A small fund eventually expressed interest and conducted complete due diligence. The size of the investment required was $18MM and a syndicate was needed to complete the round of financing. The lead investor, i.e. the small fund, took the company on a road trip and eventually lined up a stellar group of funds to co-invest. Final deal documents were completed and each of the funds executed the documents agreeing to invest their part.
This public company was required to obtain shareholder approval to complete the transactions. A meeting was scheduled for all shareholders to vote and approve the deal and the company contacted any shareholder that might not attend and obtained the proxies to vote their shares. Three days before the scheduled meeting, the lead investor called and told the poor CEO the syndicate had decided not to invest after all. The CEO had to stand in front of more than 60 investors, cancel the meeting on the scheduled date, and inform them of the chances of the company going into bankruptcy. Obviously, the investors were unhappy to say the least and had rather ugly comments.
In the end, the company did find funding a few months later but not the amount originally promised. The company did survive to fight another day.
The point is; “do not count on your investment until it is in the bank, and you have spent it. Investors can attempt to come after the money after making the investment.”
Example 2: A fund promised to invest in a winning company of a competition. The fund also promised to make introductions to help the winning company. After the competition concluded, the fund met with the winning company and verified a willingness to invest and help build the company. Eventually, the company found additional investors but the fund never followed through with any of their promises.
The point is; “some investors really want to help but tend to express their desires without any ability to follow through with promises. Because someone tells you they like you and want to help, does not mean they will.”
Example 3: A company fell on hard times during a financial downturn. They took a loan from a fund that specialized in distressed companies. The company later sold an asset and a second company, the buyer. The buyer agreed to take over the note from the fund and the fund agreed to the loan swap. The fund managers were initially helpful and worked with the company but then fell on hard times due to economic conditions. That was when the fund managers became highly aggressive and combative relative to collecting on their note. Eventually the loan was paid back, but the fund managed to extract amounts from the buyer that were well in excess of the loan. The buyer also incurred significant legal costs in managing the highly aggressive behavior of the fund. The activities scared off many other potential investors that could have helped the company.
The point is; “ investors sometimes have financial problems too. If possible, try to learn more about the personality of the investors. The way they act in difficult times can cause you significant problems severe enough to cause a company failure while the investor tries to save themselves.”
You can follow Taffy Williams on Twitter by @twilli2861 and you can email him with questions at firstname.lastname@example.org or contact him via company contact info in the website. More Startup information is contained in his personal blog.