3 recent instances of un-desirable investor behavior from my experience
Disclaimer: All three cases are start-ups in my investment portfolio or I may invest in shortly. All three cases Indian. All three have happened in the last 9 months. For obvious reasons, I cannot disclose either the VCs' names or the startups' names.
Case 1: Early Stage VC signs term sheet with start-up, the standard 90 day exclusive window and due diligence begin, start-up founders stop engaging other VCs. Around the 85th day, VC asks for a few days of extension to get 'internal approvals', coaxes the founder into making an expensive key hire as CP, then wants to renegotiate the valuation saying “we have to get all our internal folks on board and some of them are just not comfortable”. Helpless founder agrees to drop valuation by 20%.
Case 2: VC signs term sheet for a USD 3 MM round, early investors [angels] participate to the extent of 10%, a SHA is negotiated with excruciating rigour, involving Level A law firm, forcing early investors to drop most of their rights. SHA is signed, early investors pay up. VC $$ gets delayed by a few weeks, then a few months. After about 6 months, VC pulls out of the deal citing NBFC crisis. [“We are dropping two other deals as well, so you are not the only one”]. So the founder now has 10% of the original round and has to open conversations again.
Case 3: Angel Investor commits Rs 50L at a Rs 5 Cr valuation to a Bangalore based start-up, transfers Rs 5L, signs SHA. After a few months, it’s clear the balance Rs 45L wont come, because the ‘business environment has changed’. It’s now 12 months, the start-up needs Rs 50L. But the new investors wont recognise Rs 5 Cr as a right valuation and the early investors may not agree to a down round, so the founder is in a fix.
Now, I am neither saying that businesses or our environment are always predictable nor do I believe that founders are naive. But this many and this often? It just doesn’t feel right. Start-ups are not like regular businesses with regular customer side inflow of money. They are mostly experiments with under-test business models, and whole lot of founder dreams and sweat.
Investors must know what they are playing with.