Stay Away From These INVESTORS

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Welcome to the ten minute MBA, I'm yourhost Scott de Clary on the ten minute NBA, I give you useful tools, tipstrategies, tactics that you can use to start scale grow or Tex Your Business.Today, I'm going to help you understand what type of investors you should workwith and what type of investors you should stay away from, based on a truestory that happened to a friend of mine. This is a story about why not all moneyis good. Today, I'm going to be speaking about predatory investment,malicious investment. Who is this going to be helping? This is going to behelping. Entrepreneurs were looking for money, we're looking to raise money tostart a business and they get caught up with the wrong folks. What do I mean bythis? Well over my career, I've worked with a significant amount ofentrepreneurs. I've also tried to start my own businesses, consultingbusinesses, software businesses, I'm an entrepreneur at heart and I've dealtwith a wide variety of investors. Now investors can be many different typesof individuals and they can also come into your business at different stages,but usually the people that run into perhaps aligning with a bad investorare the people that have never done this. Before are the people that aretrying 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 withis OPM or other people's money. It's usually based on the premise that youdon't want to risk your own capital or your own money that you saved. Perhapsby working for many years, you have a nice little nest egg and you want tostart a business. It's usually still smarter, if possible, to use otherpeople's money. So you may be asking Scott I'm going to go raise money. Ifsomebody gives me money, isn't that...

...good enough? And the answer is nodefinitely not for a variety of reasons. Let me first list off the reasons whyjust anybody's money isn't good and then I'll speak about some practicesthat you should look out, for that would cause you to raise a red flag sothat, if you do run into people like this, you need to run as fast as youpossibly can in the other direction. But first, let's speak about just someof the reasons why you don't want to take everyone's money or anybody'smoney, and even if these people aren't malicious, so they're, not you know,they're not trying to do something bad towards. You. There's still reasons whyyou shouldn't take certain individuals money when you're raising money, youneed to work with people who are going to add value to your business. You wantto work with people that can bring something to the table and what doesthat mean? Well, it means something different for everybody. Granted, notevery investor you're going to work with is going to know the INS and outsof your business or your industry, especially if you're doing something,that's cutting. Add your bleeding edge or breaking into a new industry thatperhaps they've never heard of before or they've never dealt with, and theresearch or the industry itself is just so new that it's hard to find somebodywho's an expert or a veteran in the industry, depending on who you'relooking to raise money from and also depending on what stage your company isat. For example, when you're raising money, usually you will have friendsand family round, then you can go to angel investors and then you'llprobably want to go to institutional investment, otherwise known as venturecapital, friends and family usually is exactly what it sounds like whereyou're literally borrowing credit cards or money from people that you know andthen an angel round or Angel Investment, they're, usually high net worthindividuals. They could just be people who have great jobs, people who make alot 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, somepeople in real estate and people and...

...finance whatever it may be. People havemade a lot of money, may just want to put their money somewhere and invest sothat would be angels and then venture capital are firms, organizations,investment banks, whatever it may be, who have been set up to invest and atevery stage you know, each type of investment comes with different nuancescomes with positives and negatives. Also, each type of investment isappropriate for different size companies. For example, if you have twohundred employees- and you have say thirty to forty million- an annualrecurring revenue you're not going to ever- go to friends and family, mostlikely you're- probably going to go to an actual firm to go, raise money, aventure capital firm. But whenever you're going to raise moneyregardless it could be friends and family, it could be angel investors, itcould be venture capital. You want them to be able to provide some value now,of course, the moreinstitutionalized, the investment is, the better chancethey're going to be able to provide value, so a VC firm is going toprobably provide a lot more value than just your friends and family. But let'sassume, for the sake of the today's video in today's argument, thateverybody who you're dealing with could offer some sort of value and it has theopportunity to offer you value. So, if you're going to raise money from VCfirm, a versus VC firm B, you want to make sure they can offer some value toyour business more often than not. If you have an exciting project and agreat business venture, you are going to raise money from somebody who givesyou perhaps the first offer, if you've never done this before or the mostexciting offer, and you forget to see what else they can bring the table,they could bring operational experience. Maybe somebody a high net worthindividual or venture capitalist, or you know, maybe e e n, perhaps yourfriends or family, but a little bit a little bit less likely. That's going tohappen has had incredible success with businesses in the past and they canactually help you in the operations is...

...not everybody, but some can do thatthey can have network, so they can lead the round. An individual can put moneyin first and then that means that they're going to have a network ofindividuals that will also likely put money in after that. First individualsput money into your company, or perhaps it could not be somebody who's, leadinga network of individuals who wants to invest, but it could be somebody whojust has a great network who could be potential decision makers stake,holders that they can reach out to, and you can potentially sell your productto also they could just have subject matter expertise. So maybe it'ssomebody who does know your industry very well, a veteran in your industryand that's the kind of person that can actually help you improve your productor how you do business or how you market or how you sell. So there's alot of different benefits that you should look for when you are going toraise money, possibly the this. The worst thing you could do would be tojust go, raise money and not assume that somebody who's putting money intoyour company can offer more benefit than just the money itself, becausethat's usually not true, and if you do find somebody who does not offer anyvalue to your company, there's a good chance that could actually hurt you,because they don't understand your product, your potential market, how tobuild a business, and you do run into trouble. Well, it's usually the peoplethat put money into your business will be most likely to help you and if theyhave the ability to help you that's who you can go to that to you can lean on.But the moral of the story is, whenever you raise money, make sure the personthat you're looking to raise money from and who you're going to bring into yourbusiness is going to add some more value than just the capital. And I'mgoing to tell you another story about I mentioned before. I was going to talkto you about red flags before I get into that story, because it's a reallygood story. I want to just highlight a few other things that you should beaware of since we're already on the topic when you're raising money, sothings that you just have to keep top of mind. Don't raise money too early,because investors want a clear path to...

...revenue. Don't raise more money thanyou need, don't dilute your company more than you have to don't ask for toolittle so make sure you cover your operating expenses. Make sure you coveryour salary so that you can be comfortable. So you're not stressed out,don't give up when you're pitching to investors is going to take a lot ofpitching it's going to be a full time job. It's usually actually recommendedthat, if, even if your co founders, one person focuses exclusively on pitchingand the other person focuses exclusively on building the business ortaking a product to market at that early stage, because it can be so timeconsuming make sure you actually have a plan for Building Your Business, makesure you aren't again taking on partners that don't offer value makesure you know your numbers, know your market now your product. Now yourrevenue projections know your competition know everything that youneed to know, so you can prepare and properly pitch, make sure that you'reup front about issues that you're going to have in your business. So there's nosurprises for the investor. After the fact, and like everything in businessmake sure you actually ask for advice, go find mentors who have done thisbefore, even if they're not going to invest, they can give you advice andthey can probably point you in the direction of somebody who couldactually invest in that value in your business that, let's that's, let'spause there. So that's sort of why you should always focus on investors whoadd value and then some other things just to keep top of mind. Now, let's gointo the main point. I wanted to drive home, let's start with a story, so Ihave a friend and this friend got a call from from one of their friends andthe call went like this. You know ring up so and so yeah, you know how's thefan how's it been. Oh, you know by the way I know that you've been trying tostart. My friend has been trying to start a business for a while and theirfriend had said. Well, just so happens I had actually I had been working inthe startup space. I had been working to broker deals and to find money forCCOMPANIES that wanted to start new...

...businesses. I actually set up a dealfor a company that wanted to start a new business and what these brokers dois they bring together both the business and the lender, so they bringtogether to start up the people that are looking to find money, as well asthe investor who wants to invest in their business. Basically how the dealwas structured was the investor was going to invest so much in theirstartup. The investor wanted to take theircompany public soon so that they could be liquid, and then I was going to getbasically twenty five percent of the deal or twenty five percent of themoney race or something along the lines like that. But that's really the newants of the story so start up. Investor broker. Investor is going to give moneyto the start up if they promise to go public and the brokers going to gettwenty five percent in the and the broker says, but the deal fell throughso basically the start upset. You know, I am not sure about this. I don't knowif I should pay the broker twenty five percent, the broker said: Forget itI'll go, find another start up. Who wants this money, so the broker goesback to the investor and says: listen, t the start didn't work out so well,I'm going to. I want to work with you, but we have to find another company andthe investor says: That's fine, find anybody as long as the go public andlet's talk about this. So what is happening right now and I don't know ifthe broker knows or if the broker is in on this. What is happening right now isthe start up really really lucked out by not taking that deal, and why didthey do that? Because what's happening here is the start up wants to raisemoney because they have a great idea: investor. The investor always wants areturn on their money in traditional business. The investor will put moneyinto the start up in hopes of another exit event. What is an exit event? Anexit event is when a start up raises another round, a funding so a start up.For example, they could raise five million dollars and then, in a year,they'll raise maybe twenty five million or fifty million or whatever, and whenthey raise that next round of funding.

So that's when you hear the term seriesyou know ABC whatever you hear those series a B C series: A is a round. Afunding series B is the next round of funding and when start up rays the nextround of funding, then the investors that got in in the previous series. Sothe series, a investors, make their money when they raise the next round offunding and there's a whole bunch of different terms that can be set up forhow I start up praises money, but that's the basic premise and the basicconcept. So usually that's how startups work? That's how investment works, butwhat this investor was trying to do was they were trying to invest money, butthey were saying. I want you to take the company public. What is public mean?A public company means that you, you, as a citizen as an individual, canpurchase shares in that company on a stock exchange stock exchanges that youwould probably know Nasdaq do ts, there's other ones. There's a TS. There's like the Frankfurt Exchange,there's one more in Ontario, sorry, not Ontario in Canada. There's the neoexchange, the CS, the Canadian Securities Exchange all those smallerones like Frankfort neo, Canadian securities. These are small, calfs,small stock exchanges and then like the big ones like like the t, sx or Naza.Those are the ones that you know this with the large stock exchanges. So whena company lists their company when they go public, that means that the averageJoe can go purchase shares in a company. Usually companies don't go public untilthey're much larger. You hear about Ipos all the time when companies gopublic when the IPO they're talking about I pealing on the largest stockexchanges, 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 alittle bit earlier on. Perhaps, for example, the the fees associated with alarge 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 everysingle year and it's very, very difficult and expensive to list on amajor stock exchange. Is some companies choose to use smaller, stoff exchanges?If the company itself is smaller and perhaps as they grow, then they willchoose to graduate to to larger stock exchanges and have access to a largermarket of smaller investors right retail investors. So the issue withwhat's happening in our previous story, where we have a start up, and then wehave an investor who wants to put money to the start up, but only if they gopublic is that the investor does not actually care about. The start up hearme out if the, if the investor puts money into the start up and the startup only if the startup goes public. That means that, at any point theinvestor can liquidate their shares and they can basically make their moneyback. Even if the startup is failing, the investor can liquidate their sharesand make their money back and then some and a lot they can make a lot of moneyoff this, and my issue with this is that that means that the investor andthe start up are not aligned. Their goals are not congruent, and that isreally a recipe for failure. It's a recipe for disaster and what I findwith a lot of these types of scenarios. Not all of them are malicious, but moreoften than not, you see investors who want to follow this path, invest incompanies only figgle public. Again, the investor wants to make money. Theywant to hedge the risk, if they want don't believe in the company or tobelieve that they can pump up the stock price so that they can make money. Evenif the company fails, you see a lot of this with emerging markets who is withmedical tech. You see this with block. Can you see this with cannabis?You see this with markets that aren't truly defined, where there's still alittle bit of hype around them and where there's a little bit of Fomo andin theory, if you, if you really...

...oversell over market what the companyis doing. If it's in an exciting emerging industry, a retail investorwill 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. Thisis a point that didn't even bring up the company. That's looking forinvestment does not have a product is not have a revenue, that's a huge redflag. So when the broker was putting this deal together, the investor said Idon't. Even I don't you know. Even if you don't have a product you're, not ofrevenue, we still want to invest with you when the start up pulled out. Theinvestor said just find another company, that's in the same space, same space,same ministry, something and the company itself was in was in Metech andthen will invest in them. This means that they don't care about the product.They don't care about. The revenue. Is there a chance to start up as going tofulfill those things and do those things and bring a great product tomarket and and build revenue and sell and do all the things a start up issupposed 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 Idon't actually care if you do all the things that a traditional start upshould do to be successful. Yet I can still make my money back. That meansthat you could, in theory, be running into some legal issues, but also thatmeans that the investor is not aligned with the start up and to start up ifthey're, failing, if they're, not fulfilling they're, going to probably run on thewrong side of the law, because they will be publicly trading, they'll bepromoting their product and they'll be a failing business and the investor isgoing 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 astartup environment, if you're an entrepreneur- and somebody says I wantto take here- I'm going to invest with...

...you. If you take your company publicrun the other way, they are not acting in good faith and even if they arethey're, probably not somebody who you want to get into bed with, because atthe end of the day, their goals do not line up with your goals. Your failurecould still, unfortunately, mean they get a massive return on theirinvestment and that's not good business. And unfortunately, if that really doeshappen, now we're talking people that could pump up stocks that really haveno business merit, no actual anything under the hood and then we're gettinginto a legal territory. If there's an investor, that's trying to advertise orPR or market a company that doesn't have a product or doesn't have revenueand that company's public. Well, that's that securities fraud so just be awarethat these are the types of companies that I would ten out of ten times.These are the types of companies. These are the types investors that I wouldtend out of ten times recommend you run away from as fast as possible, a trueinvestor, a good investor, a good partner, which is what you need as anentrepreneur. You there's enough o there's enough entrepreneurs failingwho have good partners, so don't pick a bad partner from the GECKO. Don't picka business model that could potentially put you in a precarious legal situationfrom the GECO. So pick a partner pick, an investor, it'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 belooking at your annual revenue, your monthly revenue, if you're in software,your churn rate, your monthly active users, your margin, your customer based.These are the things that true quality investors. Look for. Not I don't carewhat company it is. I just want to take them public. So if you ever hear thosewords run as quickly as you canaway...

...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 intowhat to look for in investors when you're trying to start a new business.So I hope this story- and I hope some of these lessons just make you thinkbefore you partner with somebody again any business problems. You have don'tworry. I got you. This has been another ten minute. NBA have a great night I'll,see you tomorrow. I.

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