5 reasons to reject startup funding

Not all investors are created equal. We break down the top 5 scenarios a founder should reject funding.
Dec 15, 2019 • 6 minute read
Edward Kost @EdwardKost
Technical Co-pilot
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When you should reject a funding offer

Just the thought of rejecting startup funding might seem criminal to startup founders. But even though the task of securing startup funding is tortuous, you should be wary of accepting some investors. Accepting startup funding from the wrong investor may not only be detrimental to your business, but also to your mental health.

1. An investor who doesn't have your best interests at heart

An investors needs to be perfectly aligned with the vision you have for the business. If not, they'll steer the development of your startup in a direction you never intended.

The best way to communicate your vision is through a comprehensive business plan. A solid business plan will make all of your intentions crystal clear, so any disagreements will be voiced by investors.

In saying that, investors can offer suggestions for improvement. Be open minded enough to consider these suggestions as long as they're working against your best interests.

It's a good idea to also outline a list of values your startup will be governed by, and to mentally compare the attitude and plans of investors against this list. If there's a misalignment, it'll lead to disagreements in the future.

2. An investor who's a bully

An outright bully will completely disregard your ideas and force you to follow their instructions.

Not only will this stamp out the flame that sparked your passion for the venture, it may also seriously affect your mental health. No investment, no matter how large, is every worth that.

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Identifying a bully isn't always easy. They usually keep aggressive behavior on a short leash during the delicate negotiation process, but reveal their true nature once they've assumed control.

To identify whether your potential investor is a bully, keep an eye out for these signs:

They speak over you and cut you off

Anyone who repeatedly cuts you off to voice their opinions doesn't respect your intelligence. If an investor does this before you've even agreed to accept their funding, it'll only significantly escalate when your startup faces difficulties. 

A good investor will always be willing to completely listen to your thoughts and respect your ability to challenge their ideas.

Threats  

Bully investors who fear financial loss over the wellbeing of others will try to smuggle subtle threats into the conversation without being too overt to scare you off.

Words such as, "you better get that done," or, "I better see results," or, "I never fail," are usually just precursors to some seriously threatening behavior.

If you notice an investor saying things like this, don't be afraid to challenge them by asking them what the repercussions are. A wise investor understands there will be difficulties when growing a startup, and they should offer to support you during these difficulties, not attempt to scare you into "elite performance mode."

Exercise performance monitoring 

How frequently you update investors depends on the structure of your business. Passive investors who are are only interested in monetary profit and don't want to be involved in operations only require updates every quarter and during every board meeting.

Active investors who want to participate in operations and decisions need to be updated more often, between once a month to multiple times a week. But that doesn't give them the right to micromanage you.

If an investor lends their expertise to your day-to-day decisions they should trust you to execute them. Ask your investors how often they would like to be updated. If you fear that they might step over their boundaries and start micromanaging you, be up front and voice your concerns.

You shouldn't be afraid to challenge investors like this. There are plenty of other funding options out there, and if a prospective investor retracts their offer just because you voiced your concerns, maybe it's for the best.   

3. An investor who attempts to take complete control

There are two reasons an investor might attempt to take control of your startup:

1. They are not aligned with your vision. 

2. They don't trust your expertise.

As we said before, a well-structured business plan will put your vision and goals in clear view of all investors, so you can  ask them if they have any disagreements with your plans.

Identifying whether or not an investor trusts your ability to run the business is a little difficult. If you lack expertise in the category of your startup, you can fill any knowledge gaps with an advisory board of seasoned experts. Investors can also help you with their expertise (in healthy doses, without assuming complete control).

But having a team of expert advisors to appeal to doesn't relinquish your position at the helm. It'll still be you calling the shots and running the business. 

To test your leadership qualities, some investors will present you with a series of scenarios and ask what you would do in each of them. If you satisfy them with your answers, it's a good sign they trust your leadership.

4. An investor who isn't qualified

If an investor funds your startup with the condition that they play an active role in its development, you need to be certain that their expertise will be a beneficial contribution. Having enough money to invest in a business doesn't automatically mean you have the qualifications to direct it.

So how do you investigate the qualifications of a prospective investor?

There are a few methods.

Business reviews 

Investors are usually business owners themselves, so you can get a sense of their business acumen through their business ratings.

You can find a list of all the businesses an investor owns on their LinkedIn profile. You can use these resources to find customer and employee ratings for each business:

Make sure you also note down all the businesses they previously directed as listed on their LinkedIn profile. There might be a reason why they stepped down from leadership.

 

Investment Advisor Public Disclosure

A fantastic free resource for performing background checks on investors is the Investment Advisor Public Disclosure.

investor background check

This is a database of registered investment firms and individuals, and it's surprisingly comprehensive. The results disclose professional background of the firm or individual, employment history, current registrations and even any disciplinary events (present and historic).

Make sure you click on the PDF report option in the search results for this level of detail. 

investor background check

4. An investor who has unrealistic expectations

Unfortunately, many investors expect founders to be experts in all areas of the business, which is an unfair expectation. Investors who demand perfection are usually trying to prevent founders from spending their funding money on hiring additional staff.

When the burden of universal perfection is impressed upon a founder, it stretches them thin and eventually completely burns them out.

Empathetic investors will understand that founders have limited abilities, and require the support of other staff to fill important talent gaps.

Instead of expecting founders to do all the work, a more intelligent cost-saving solution is to tap into the global talent pool on a project-by-project basis without the financial burden of full-time employment or contracts.

Founders with unrealistic performance expectations also run the risk of prematurely scaling their startup to appease investors. Premature scaling is one of the leading causes of startup failure, so if you misinterpret your analytics and start journeying down this path, you'll initiate the countdown to your startup's demise.

5. It just doesn't feel right

Nothing beats good old fashioned intuition. If something doesn't feel right, there's a good chance that it isn't. A successful funding round should be a time of celebration, not debilitating anxiety over the possibility of an oppressing investor.

Make sure you always give yourself some time to think over an offer rather than instantly accepting in blind euphoria. You should think over an offer for at least 24 hours to give yourself enough time to sleep and consider the decision with a fresh mind. 

How to decline a funding offer

If an investor fits any of the above categories, you'll need to gently decline their offer. This should be done very delicately so as not to burn bridges. The investor may have powerful connections, and you don't want a tainted reputation in the investor community.

The best method is to just be up front and honest. Don't attempt to soften the blow with bloated excuses or hollow compliments. Simply tell them that their vision for the business doesn't align with yours, which may impact the profitability of their investment.

This demonstrates the respect you have for the success of your investors by not wanting to accept their funding unless they could benefit from the investment.

Conclusion 

Even if your startup is starved of funds, you should consider the implications of every funding offer carefully before accepting. Follow these guidelines to prevent the wrong investors from stifling your startup dream.

Bodite na tekočem

Naročite se na naše glasilo, da boste na tekočem pri pomembnih zadevah.
Hvala za naročilo! Spremljajte svojo prejeto pošto za naslednjo novico.

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