Starting A Business? Stay AWAY From These Investors! #scottsthoughts

Hey there, Scott here. Welcome to another episode of the success story podcast. Today, I'm going to speak about investors. I'm going to speak about predatory investors. And most importantly, I'm going to speak about what kind of investors you should stay away from. I have a story for you about predatory investors and how they almost got their fangs into one of my friends and how it can absolutely destroy your business and your life. Stay tuned. This is a story about why not all money is good today. I'm going to be speaking about predatory investment malicious investment. Who is this going to be helping this is going to be helping entrepreneurs were looking for money were looking to raise money to start a business and get caught up with the wrong folks. What do I mean by this well over my career. I've worked with a significant amount of entrepreneurs. I've also tried to start my own businesses consulting businesses software businesses. I'm an entrepreneur at heart and I've dealt with a wide variety of investors. Now investors can be many different types of individuals and they can also come into your business at different stages, but usually the people that run into perhaps aligning with a bad investor are the people that have never done this before are the people that are trying to raise money for the first time to start their business. Because as you know, the saying goes the best type of money to start a business with is OPM or other people's money. It's usually based on the premise that you don't want to risk your own capital or your own money that you saved perhaps by working for many years. You have a nice little nest egg and you want to start a business. It's usually still smarter if possible to use other people's money. So you may be asking, Scott, I'm going to go raise money. If somebody gives me money, isn't that good enough? And the answer is no, definitely not for a variety of reasons. Let me first list off the reasons why just anybody's money isn't good. And then I'll speak about some practices that you should look out for that would cause you to raise a red flag so that if you do run into people like this, you need to run as fast as you possibly can in the other direction. But first, let's speak about just some of the reasons why you don't want to take everyone's money or anybody's money. And even if these people aren't malicious or they're not, you know, they're not trying to do something bad towards you, there's still reasons why you shouldn't take certain individuals money. When you're raising money, you need to work with people who are going to add value to your business. You want to work with people that can bring something to the table. And what does that mean? Well, it means something different for everybody granted not every investor you're going to work with is going to know the ins and outs of your business or your industry, especially if you're doing something that's cutting edge or bleeding edge or breaking into a new industry that perhaps they've never heard of before or they've never dealt with. And the research or the industry itself is just so new that it's hard to find somebody who's an expert or a veteran in the industry, depending on who you're looking to raise money from and also depending on what state your company is at, for example, when you're raising money, usually you will have friends and family around. Then you can go to angel investors and then you'll probably want to go to institutional investment. Otherwise known as venture capital friends and family usually is exactly what it sounds like where you're literally borrowing credit cards or money from people that you know, and then an angel round or angel investment. They're usually high net worth individuals. They could just be people who have great jobs, people who make a lot of money. It could be people who have, you know, exited a company before, but it doesn't always have to be you could think of doctors, lawyers, some people in real estate, some people in finance, whatever it may be, people who have made a lot of money may just want to put their money somewhere and invest. So that would be angels and then venture capital are firms, organizations, investment banks, whatever it may be who have been set up to invest and at every stage, you know, each type of investment comes with different nuances comes with positives and negatives. Also, each type of investment is appropriate for different size companies. For example, if you have 200 employees and you have say 30 to 40 million in annual recurring revenue, you're not going to ever go to friends and family most likely. You're probably going to go to an actual firm to go raise money, venture capital firm, but whenever you're going to raise money, regardless, it could be friends and family, it could be angel investors, it could be venture capital. You want them to be able to provide some value. Now, of course, the more institutionalized the investment is, the better chance they're going to be able to provide value. So a VC firm is going to probably provide a lot more value than just your friends and family, but let's assume for the sake of today's video and today's argument that everybody who you're dealing with could offer some sort of value and has the opportunity to offer you value. So if you're going to raise money from VC firm A versus VC firm B, you want to make sure they can offer some value to your business more often than not. If you have an exciting project and a great business venture, you're going to raise money from somebody who gives you perhaps the first offer. If you've never done this before or the most exciting offer and you forget to see what else they can bring to the table, they could bring operational experience, maybe somebody a high net worth individual or venture capitalist or maybe even perhaps your friends or family, but a little bit less likely that's going to happen has had incredible success with businesses in the past and they can actually help you in the operations. Not everybody, but some can do that. They can have networks so they can lead the round an individual can put money in first and then that means that they're going to have a network of individuals that will also likely put money in after that first individuals put money into your company or perhaps it could not be somebody who's leading a network of individuals who wants to invest, but it could be somebody who just has a great network who could be potential decision makers, stakeholders that they can reach out to and you could potentially sell your product to. Also, they could just have subject matter expertise so maybe it's somebody who does know your industry very well, a veteran in your industry and that's the kind of person that can actually help you improve your product or how you do business or how you market or how you sell so there's a lot of different benefits that you should look for when you are going to raise money. Possibly the worst thing you could do would be to just go raise money and not assume that somebody who's putting money into your company can offer more benefit than just the money itself because that's usually not true. If you do find somebody who does not offer any value to your company, there's a good chance they could actually hurt you because they don't understand your product, your potential market, how to build a business and you do run into trouble. Well, it's usually the people that put money into your business will be most likely to help you and if they have the ability to help you, that's who you can go to, that's who you can lean on. So the moral of the story is whenever you raise money, make sure the person that you're looking to raise money from and who you're going to bring into your business is going to add some more value than just the capital. I'm going to tell you another story about, I mentioned before I was going to talk to you about red flags before I get into that story because it's a really good story. I want to just highlight a few other things that you should be aware of since we're already on the topic when you're raising money. So things that you just have to keep top of mind don't raise money too early because investors want to clear path to revenue. Don't raise more money than you need. Don't dilute your company more than you have to. Don't ask for too little. So make sure you cover your operating expenses. Make sure you cover your salary so that you can be comfortable so you're not stressed out. Don't give up when you're pitching to investors. It's going to take a lot of pitching. It's going to be a full time job. It's usually actually recommended that even if your co-founders one person focuses exclusively on pitching and the other person focuses exclusively on building the business or taking a product to market at that early stage because it can be so time consuming. Make sure you actually have a plan for building your business. Make sure you aren't again taking on partners that don't offer value. Make sure you know your numbers, know your market, know your product, know your revenue projections, know your competition, know everything that you need to know so you can prepare and properly pitch. Make sure that you're upfront about issues that you're going to have in your business so there's no surprises for the investor after the fact. And like everything in business, make sure you actually ask for advice. Go find mentors who have done this before. Even if they're not going to invest, they can give you advice and they can probably point you in the direction of somebody who could actually invest and add value in your business. Let's pause there so that's sort of why you should always focus on investors who add value and then some other things just to keep top of mind. Now let's go into the main point I wanted to drive home. Let's start with a story. So I have a friend and this friend got a call from one of their friends and the call went like this. You know, ring up so and so. Yeah, you know, how's it been? How's it been? Oh, you know, by the way, I know that you've been trying to start my friend has been trying to start a business for a while and their friend had said, well, just so happens. I had actually I had been working in the startup space. I had been working to broker deals and to find money for companies that wanted to start new businesses. I actually set up a deal for a company that wanted to start new business and what these brokers do is they bring together both the business and the lender. So they bring together the startup, the people that are looking to find money as well as the investor who wants to invest in their business. Basically, how the deal was structured was the investor was going to invest so much in their startup. The investor wanted to take their company public soon so that they could be liquid and then I was going to get basically 25% of the deal or 25% of the money raised or something along the lines like that. But that's really the nuance of the story. So startup investor broker investors going to give money to the startup if they promise to go public and the broker is going to get 25% and the broker says, but the deal fell through. So basically the startup said, you know, I am not sure about this. I don't know if I should pay the broker 25% the broker said, forget it. I'll go find another startup who wants this money. So the broker goes back to the investor and says, listen, the startup didn't work out so well. I'm going to, I want to work with you, but we have to find another company and the investor says, that's fine. Find anybody as long as they go public. And let's talk about this. So what is happening right now? And I don't know if the broker knows or if the broker is in on this. What is happening right now is the startup really, really lucked out by not taking that deal. And why did they do that? Because what's happening here is the startup wants to raise money because they have a great idea. The investor investor always wants to return on their money in traditional business. The investor will put money into the startup in hopes of another exit event. What is an exit event? An exit event is when a startup raises another round of funding. So a startup, for example, they could raise $5 million and then in a year they'll raise maybe 25 million or 50 million or whatever. And when they raise that next round of funding, so that's when you hear the term series, you know, A, B, C, whatever, you hear those series A, B, C, series A is around a funding series B is the next round of funding. And when startups raise the next round of funding, then the investors that got in in the previous series, so the series A investors make their money when they raise the next round of funding. And there's a whole bunch of different terms that can be set up for how a startup raises money, but that's the basic premise and the basic concept. So usually that's how startups work. That's how investment works. But what this investor was trying to do was they were trying to invest money, but they were saying, I want you to take the company public. What does public mean? Public company means that you, you as a citizen as an individual can purchase shares in that company on a stock exchange. Stock exchange is that you would probably know NASDAQ Dow TSX. There's other ones. There's a TSX V. There's like the Frankfurt exchange. There's one more in Ontario, sorry, not Ontario in Canada. There's the Neo exchange, the CSE, the Canadian securities exchange. All those smaller ones like Frankfurt, Neo, Canadian securities, these are small caps, small stock exchanges, and then like the big ones like the TSX or NASDAQ, those are the ones that you know, those are the large stock exchanges. So when a company lists their company, when they go public, that means that the average Joe can go purchase shares in a company. Usually companies don't go public until they're much larger. You hear about IPOs all the time when companies go public, when they IPO, they're talking about IPO on the largest stock exchanges, but a lot of companies also go public on smaller stock exchanges for a variety of reasons. It could be, for example, that they just want to be liquid a little bit earlier on. Perhaps, for example, the fees associated with a large stock exchange just are too much. They have to pay actual listing fees, they have to pay accountants to make sure that they're compliant every single year, and it's very, very difficult and expensive to list on a major stock exchange. So some companies choose to use smaller stock exchanges, if the company itself is smaller, and perhaps as they grow, then they will choose to graduate to larger stock exchanges and have access to a larger market of smaller investors, right, retail investors. So the issue with what's happening in our previous story, where we have a startup, and then we have an investor who wants to put money into the startup, but only if they go public, is that the investor does not actually care about the startup. Hear me out, if the investor puts money into the startup, and the startup only if the startup goes public, that means that at any point, the investor can liquidate their shares, and they can basically make their money back. Even if the startup is failing, the investor can liquidate their shares and make their money back, or then some, and a lot, they can make a lot of money off this. And my issue with this is that that means that the investor and the startup are not aligned. Their goals are not congruent, and that is really a recipe for failure. It's a recipe for disaster. And what I find with a lot of these types of scenarios, not all of them are malicious, but more often than not, you see investors who want to follow this path, invest in companies only if they go public. Again, the investor wants to make money, they want to hedge their risk, if they want, don't believe in the company, or to believe that they can pump up the stock price, so that they can make money, even if the company fails. You see a lot of this with emerging markets, you see this with medical tech, you see this with blockchain, you see this with cannabis. You see this with markets that aren't truly defined, where there's still a little bit of hype around them, and where there's a little bit of FOMO. And in theory, if you really oversell over market, what the company is doing, if it's in an exciting, emerging industry, a retail investor will probably buy. And that's a big issue, especially if from the get go, they don't even have a product, and this is actually a really strong, this is a point that I didn't even bring up. The company that's looking for investment does not have a product, does not have revenue, that's a huge red flag. So when the broker was putting this deal together, the investor said, I don't even, I don't, you know, even if you don't have a product, you don't have revenue, we still want to invest with you. When the startup pulled out, the investor said, just find another company that's in the same space, same space, same industry, something and the company itself was in Medtech, and then we'll invest in them. This means that they don't care about the product, they don't care about the revenue. Is there a chance the startup is going to fulfill those things and do those things and bring a great product to market and build revenue and sell, and do all the things the startup is supposed to do. Yes, there is a chance, but there's also a chance they won't. And the issue is when an investor says, I'm going to put money into you, but I don't actually care if you do all the things that a traditional startup should do to be successful. Yet I can still make my money back. That means that you could, in theory, be running into some legal issues, but also that means that the investor is not aligned with the startup and the startup, if they're failing, if they're not fulfilling, they're going to probably run on the wrong side of the law because they will be publicly trading, they'll be promoting their product and they'll be a failing business. And the investor is going to be making lots of money and they're really not acting in good faith. So I have very strong opinions about investors that do this. If you are in a startup environment, if you're an entrepreneur and somebody says, I want to take your, I'm going to invest with you if you take your company public, run the other way. They are not acting in good faith. And even if they are, they're probably not somebody who you want to get into bed with because at the end of the day, their goals do not line up with your goals. Your failure could still unfortunately mean they get a massive return on their investment. And that's not good business. And unfortunately, if that really does happen, now we're talking people that could pump up stocks that really have no business merit, no actual anything under the hood. And then we're getting into illegal territory. If there's an investor that's trying to advertise or PR or market a company that doesn't have a product or doesn't have revenue and that company's public. Well, that's that's securities fraud. So just be aware that these are the types of companies that I would 10 out of 10 times. These are the types of companies. These are the types of investors that I would 10 out of 10 times recommend you run away from as fast as possible. A true investor, a good investor, a good partner, which is what you need as an entrepreneur. There's enough entrepreneurs failing who have good partners. So don't pick a bad partner from the get go. Don't pick a business model that could potentially put you in a precarious legal situation from the get go. So pick a partner pick an investor that's going to add value that's not going to ask you to go public before you even have a product God forbid revenue that doesn't make sense. An investor will always want a clear path to revenue. They'll be looking at your annual revenue, your monthly revenue. If you're in software, your churn rate, your monthly active users, your margin, your customer base, these are the things that true quality investors look for. Not I don't care what company it is. I just want to take them public. So if you ever hear those words run as quickly as you can away from that investor and go find yourself somebody else that can actually add money but also value to your business. Anyways, that's my story. I hope it gave you a little bit of insight into what to look for in investors when you're trying to start a new business. If you liked this video, please hit that subscribe button, leave some comments, some feedback below and as always have a great week and as always have a great week and as always have a great week.