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Stay Away From These INVESTORS

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The 10 Minute MBA, is a no-fluff daily podcast that teaches you practical business lessons you can use to grow your business immediately.

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Welcome to the ten minute MBA. I'm your host, Scott D clary. On the ten minute MBA, I give you useful tools, tip, strategies, tactics so you can use to start, scale, grow or x Your Business. Today I'm going to help you understand what type of investors you should work with and what type of investors you should stay away from, based on a true story that happened to a friend of mine. 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 or looking for money. We're looking to raise money to start a business and they 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 a 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 Day 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 notes of Your Business or your industry, especially if you're doing something that's cutting ad your 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 stage 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 estates and people in finance, whatever it may be. People 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 two hundred employees and you have, say, thirty to forty million and 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 the 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 be 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 the table. They could bring operational experience, maybe somebody a high net worth individual or venture capitalist or, you know, maybe even perhaps your friends or family. But a little bit, 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,...

...because not everybody, but some can do that. They can have network, 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 this 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. And 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 in 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 who you can lean on. But 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. And 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 a 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. Is going to take a lot of pitching. It's going to be a full time job. It's usually actually recommended that if, even if your cofounders, 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 your upfront about issues that you're going to having 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 in add value in your business. That let's that's 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 talk on mine. 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 from one of their friends and the call went like this, you know, ring up so and so. Yeah, you know, how's it band? Has 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 to start up the people that are looking to find money. As well as the investor who wants to invest in their business. Basically, how the deal with 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 twenty five percent of the deal or twenty five percent of the money race, or something along the lines like that. But that's really the nuance of the story. So start up investor, broker. Investor is going to give money to the startup if they promised to go public, and the broker's going to get twenty five percent. And the broker says, but the deal fell through. So basically the start upset. You know, I'm not sure about this. I don't know if I should pay the broker twenty five percent. The broker said, forget it, I'll go find another start up who wants this money. So the broker goes back to the investor and says, listen, the 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 start up 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. The investor always wants a 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? And exit event is when a start up raises another round of 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 when they raise that next round of funding. So that's when you hear the term series,...

...you know ABC, whatever you hear those series ABC, series a is a round of funding. Series be 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 start up 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 is public? Being a public company means that you, you as a citizen, as an individual, can purchase shares in that company on a stock exchange, stock exchanges that you would probably know, Nazdact Ow, ts X. There's other ones. There's a TS X V, there's like the Frankfort Exchange. There's one more in Ontario. Sorry, not Ontario, in Canada. There's the neo exchange, the CSC, the Canadian Securities Exchange, all those smaller ones like Frankfurt, neo, Canadian securities. These are small calf, small stock exchanges. Then like the big ones, like like the Tsx or Nazi, 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 ipeoing 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 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. OR SOME COMPANIES CHOOSE TO USE smaller stock exchanges if the company itself a smaller and perhaps as they grow then they will choose to graduate to two 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 start up and then we have an investor who wants to put money into the start up but only if they go public, is that the investor does not actually care about the startup. Tear me out. If the if the investor puts money into the star start up 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 and then some and 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 head their risk if they one 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. To 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 if...

...you really over sell, 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 a 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 start up pulled out, the investor said, just find another company that's in the same space, same space, same ministry, something, and the company itself was in was in Mettech, 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 to start up is going to fulfill those things and do those things and bring a great product to market and and build revenue and sell and do all the things a start up 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 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 here, 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 a legal 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 companies public, well, that's that's securities fraud. So just be aware that these are the types of companies that I would ten out of ten times. These are the types of companies, these are the types of investors that I would tend out of ten 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. You there's enough of 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 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't 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. So I hope this story and I hope some of these lessons just make you think before you partner with somebody again. Any business problems you have, don't worry, I got you. This has been another ten minute MBA. Have a great night. I'll see you tomorrow.

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