TamilChangemakers Insights: The S*&t They Don’t Warn You About When Finding Investors
"Over the years, I have experienced my fair share of success and failures in business. Some even made me question if there were still good people out there - those who wouldn’t prey on an entrepreneur's desire to bring their vision to life by leaving greed aside and offering fair deals and value. The ups and downs have taught me some incredible lessons."
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Over the years, I have experienced my fair share of success and failures in business. Some even made me question if there were still good people out there - those who wouldn’t prey on an entrepreneur's desire to bring their vision to life by leaving greed aside and offering fair deals and value. The ups and downs have taught me some incredible lessons.
To future entrepreneurs, there is no better day than today to start your business. To ensure that your own financial stability is not jeopardized, make sure you have either raised enough money or have a clear path to revenue. Some will encourage you to take unwanted risks and take a chance, but I beg to differ. You can still build a company on the side and wait until the time is right to quit your job, so you don’t risk financial calamity.
For current entrepreneurs, kudos to you for getting this far. The uncertain economy, along with many other factors, may lead to prospective mergers and acquisitions and/or the recruitment of new investors. There are all sorts of characters out there looking to “help”, some of them more interested in helping themselves - rather than your business. Here is my guide of characters that you might come across:
Deal promoters: This is someone who is an extrovert and perceived as an "expert" in whatever industry they choose. This person may woo affluent people into an investment and persuade them to put their money into a business opportunity.
Watch out for those who utilize deceptive methods to attract investors by making exaggerated growth promises and returns. Deal promoters will promise you what you need from a capital perspective, and they will demand an excessive finder's fee higher than the industry standard of 10%. I have seen deal promoters ask for anywhere from 25% to 50% prior to raising funds. Be wary of any promoters who wish to serve on the board of directors or as a C-level executive.
In the short run, you may get the funding, but in the long run, you will have to deal with many disgruntled investors and deadweight C-executives or board members, and the rest of the team will lose respect for you as a leader.
Financial Engineers: It is safe to say that financial engineers are similar to deal promoters. They are not as flashy, but have a deeper understanding of finance, legal and corporate governance systems. Typically, they look to increase wealth for themselves and those in their inner circle rather than support building a mission-oriented business. They will propose an investment with shares and warrants attached at a price much lower than their previous valuation of the company. They want all their equity upfront to participate in pre-performance without vesting schedules or lockout periods.
They seek to persuade the company to change course to follow the buzz or the latest trend (i.e., AI, Blockchain, Web 3.0, Cryptocurrency, etc.) to attract retail investors and finances and exit at the earliest chance. As unofficial advisors or core team members, they avoid having the appearance of being an insider while still enjoying all the benefits that come with it.
The business will receive investment in the short term at a significantly lower share price (down round) and be obliged to pivot to different hot market trends. If all else fails, they will pressure you to go public via a reverse takeover rather than, very seldom, an IPO. At the first chance, they will quickly liquidate all of their holdings.
Go public/shell owners: These are financial engineers 2.0. They aim to resurrect their failed publicly traded company, which they repeatedly mishandled, sold off their holdings and now want to pivot. Their goal is to get the failed public company to merge with the new private company and change the ticker symbol; this is known as reverse take over (RTO). Profitability or the bottom line is not important to them; what matters is boosting the next big stock pump. It is simple to spot since the prior stock chart will exhibit one or two sudden, inexplicable "pumps."
The issues with this group are undesired pivots, a high likelihood of “pump and dump,” tarnishing personal reputation, and their lack of concern for long-term goals. They are only concerned about a 6-12 month window rather than the long term.
To manage and mitigate abuse from the scenarios mentioned above, consider hiring or utilizing your network to find experts (legal, financial, compliance, etc.) and bring them to guide you on the deals and have a fail-safe system in place (equity vesting schedule, performance-based milestones, fee structures, a well-defined legal agreement outlining the obligations of the individuals involved, etc).
Pro-tip: Spend a lot of time thinking about the person and the individual who will write you a check. Do your due diligence.
Most importantly, bring in smart and intelligent investors who actually care about your business. You'll thank me later if you can resist fast money.
Ajan began his professional education in medicine, before realizing that his destiny lay elsewhere in entrepreneurship. He's currently the Head of Strategy at Circadian Wellness and co-founder of Eons (www.eons.com) and founder of Thiru Inc. (www.thiruinc.com), a boutique consulting firm and investment portfolio. In the past, he has exited numerous organizations and created various 30M+ evaluated companies. Ajan thrives in fast-paced, dynamic environments and always leads with empathy.
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