How Not To Raise Money

I’ve invested in nearly a hundred businesses in some form or another. While my motive is financial in some sense or another, it’s also joyful. I like making money, but I love following entrepreneurs along their journey and if possible, helping them succeed. 

If I invest in a business, I try to act the same way I wanted my investors to act when I was running Native. Generally speaking, this is a “don’t call me but pick up the phone on the first ring when I call you” type of mentality. We had several investors at Native (we raised $550,000) and I was close with two of them: Paul Ferris and Nick Green. When I wasn’t sure how to think about something, or just needed a sounding board to air out ideas, I’d call one or both of them. Both were fantastic. They took the time to listen to me, and provided valuable advice that I appreciated (even if I didn’t follow it). More importantly, they never blamed me for anything. If something was amiss at the company, I could call them and I knew I wouldn’t get asked “why did you make this mistake?”. It was a relationship where I could be transparent and I knew the feedback would be helpful and not critical. I still remember fondly calling Nick on Sunday mornings. We both tended to work on the weekends, and our Sunday calls allowed me to talk about the business without the pressure of the weekday work environment. 

I try to be that type of investor in businesses that I invest in: helpful but not critical and available but not overbearing. I hope that the CEOs of companies I invest in would say that of me. 

As an investor, I try to look at everything from the perspective of the CEO. In almost every investment I’ve ever made, the CEO is putting her life, talent, time, and even relationships on the line, while I am risking comparatively little. The outcome of the investment will not change my life at all, and more than once, I’ve advised the CEO of a business to shut down the business and return nothing, rather than work at the business for several more years in an attempt to make investors whole. 

I’ve invested in many businesses, but I’ve turned down investing in many more. I can’t identify a single thread across the decks that I’ve seen such that I feel like I can identify success. That is, each business and entrepreneur has to be evaluated on its own. But I have identified a characteristic that is correlated with the businesses failing: obfuscation. 

I’m not sure why companies trying to raise money (and their CEOs) try to obfuscate the truth, but it happens all the time. 

Example 1: 

Here’s an example of what I mean. This SaaS business in eCommerce refused to answer questions about revenue and churn by month. The deck was initially sent to me as a link, and when the link expired and I asked to see it again, the CEO said that she was no longer sharing materials with folks.

Did I invest? Absolutely not. In addition, I would probably never invest in this person for the rest of my life or their life. 

Example 2: 

Here’s another example. This CEO refused to share a P&L statement with me. What the fuck do you think I’m investing in? Your business. I need to understand how much revenue you’re doing, where you are spending money, and your burn rate. Then, she had the audacity to ask me if I had any specific questions? Yeah, I’ve got the same one Kelly Kapoor asked in The Office to Ryan: “How dare you?”

Example 3

In 2020, there was a fast growing FinTech business in the eCommerce space. I was interested in investing, and when the CEO and I spoke over the phone, it felt like I was being sold magic beans. I remember asking about how the business worked, but instead of getting an answer, I was told that the round was oversubscribed and I could invest because I was an influencer in the space. This type of conversation went on for about 30 minutes and the worst part is that I almost fell for the sales pitch. At some point though, I came to the realization that I’d rather miss a deal than invest in something I got a weird feeling about, and so passed. 

Example 4

That hasn’t always been the case though. In at least one instance I can remember, I invested in a business even though the deck didn’t agree with itself. The business was an eCommerce subscription-based business. The number of subscribers on Page 2 of the deck and Page 17 of the deck didn’t match, meaning that in at least one spot, the CEO wasn’t telling the truth. A large VC fund had asked me to invest alongside them, and I remember calling up the fund to see if they had caught the error. “I’m sure we looked into this,” said the VC partner, before promising to get back to me about reconciling the numbers. The reality became clear over the next few days: the VC fund hadn’t caught the error. But I invested anyway, and I ended up losing $500K in that deal. 

As an angel investor, you’re taking non-rational risks when you make an investment. How so? Investors who put in checks under $1 million rarely do the type of diligence that those investments deserve (it turns out many funds who put in $10M don’t do it either). They don’t do background checks on the CEO. They don’t verify intellectual property rights, or check to see if the company is involved in litigation. They don’t audit bank accounts to ensure that the revenue quoted is actually real. It really is a gamble, and the only way to mitigate that gamble is by earning trust quickly and competently. Obfuscation is an impediment to that trust, and makes investing impossible. 

If you’re looking to raise money, I’d encourage you to be honest with yourself and with your investors. Understanding where your business is vulnerable or not yet successful isn’t a mark of weakness - it’s actually a badge of honor. And it makes me more likely to invest.