Yesterday Phil Beauregard wrote an article in PandoDaily about getting crappy people out of your ecosystem. Nice. Points and Figures has written about this theme starting with 95% of the time good liars tell the truth.
Reading the comments on Phil’s post, I ascertain there is a lot of venom out there with regard to some of the phonies that troll around entrepreneurs. I empathize with them. I also agree with a lot of the points Phil made.
Bad people ripping off entrepreneurs are the quickest way to kill off innovation. One of the reasons I co-founded Hyde Park Angels in Chicago was to help entrepreneurs. We were deliberate in not charging any fees to entrepreneurs for raising capital. Our economic risk was aligned with theirs. If they made money, they bought an island. HPA investors would get a nice return. If they lost-we lost too.
It was extremely important to me that entrepreneurs got a fair shake. HPA has made mistakes, and we have problems just like any organization. But, on the whole we try really hard to accomodate entrepreneurs and see things from their perspective.
It’s still critically important to me that bad actors get called out. When I was a trader on the floor of the CME ($CME), we called out the shiesters all the time. Peer pressure ran them out. The same can be done in entrepreneurial ecosystems.
One key thing to remember, you don’t control your reputation. It’s the people that talk about you behind your back that control it.
It’s important to note, not only faux investing trolls can pollute an ecosystem. This is a two way street. Crafty Entrepreneurs can pollute it too. I want to be clear that most entrepreneurs I come across are on the level. They think they have a cool thing and want it funded. I respect the hell out of them for taking the risk. I took a ton of risk in my business, and when I write a check I see us as taking risk together.
In tough economic times, things can change. People might start a company and try to fundraise only to sustain themselves 18 months so they can go get a real job when the money runs out. They don’t care about their investors and only see them as a meal ticket until a better opportunity arrives.
Some entrepreneurs call foul when they can’t raise money on an idea. They say the angel or fund doesn’t know what they are talking about. Or they disparage the angel because they got a rejection. Conversely, it’s incumbent on angels to give quick rejections-and take longer to say yes. The ACA has data that shows the more diligence you do, the more successful you are.
Some entrepreneurs just tell you what you want to hear. They tell different investors different stories. All they want is a check so they can go on with their life. The investor isn’t a valued resource. They are a mark. This isn’t “The Sting”. Money is a scarce resource. Respect it.
I have seen entrepreneurs manipulate their financial data to give a better picture than what truly exists to trap investors into financing a deal. They use accounting tricks to book next year or next quarter sales into the present. They account for receivables or payables in a more favorable light. Sometimes they don’t show the capitalization table correctly.
Sometimes, when entrepreneurs offer references, they try to stack them to give a slanted view. Some less seasoned angel investors don’t try and find more references that would shed light on who the entrepreneurs really are.
Then, there is the post getting money part. Many a time I have seen entrepreneurs give you all the time you need, and be at your beck and call. Once the check clears you never hear from them again until they need another check.
A lot of entrepreneurs never contact you until they are well past the point of being in trouble. The angel that might have been able to do something is faced with the choice of writing a check to keep the company in business-or chalking their investment up to a sunk cost and letting them die. Solomon had an easier choice with the baby.
I have seen founders act like they are really coachable-only to become stubborn mules once they have the money. Experienced investors that try to give them advice, help them pivot to better opportunities are ignored. Founders might say, “It’s a new paradigm. That guy doesn’t even understand what we are doing.”. That sort of sentiment surfaces when referring snidely to investors that came from the corporate world. While they weren’t startup entrepreneurs, they do have a lot of experience leading teams and building organizations.
Oh, and try and get a K-1 out of an entrepreneur come tax time. Fughettaboutit. Since I started investing I never see April 15 as a deadline for filing taxes. I build the cost to file an extension into my yearly accounting fees. I’d prefer to file on April 15, because I hate to have books open through October. It increases my chance for Mr. IRS to come knocking on my door, but the entrepreneur doesn’t care about that.
When the founders fail, they walk away saying, “No biggie, I will learn from my failure. It’s okay to fail. At least I failed quickly and only cost them 500k.”. The investor is stuck cleaning up the mess. Then many times it’s just lather, rinse, repeat for them. Meanwhile, they have drained meaningful investment capital out of the ecosystem that could have gone to a company with good intentions.
Phil says some much needed things in his article. Kudos to him. Let’s root out the trolls everywhere we can. But, entrepreneurs aren’t lily white either. There are a lot of sharks in the water when you pull up with a boat full of investment money.
Without mutual respect for the value each brings to the table, the marriage isn’t good and won’t last. That being said, when you find a great entrepreneur, nothing is more gratifying than working with them.