What Are The Warning Signs You Have A Bad Investor?

Ying yang symbol of harmony and balance, vector illustration

“You truly have the Yin and Yang of investors,” Regis McKenna said to me. Regis was introduced to me by Gill, the “Yang” (bright side) of our investors.

But Regis also had worked with “Raul”, the “Yin” (dark side) of our investors. In fact Regis shared story after story, many of them truly hilarious, about Raul.

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Regis’ message was clear: Watch yourself with Raul.

At this point in our relationship, Raul hadn’t been very disruptive. That would come later.

However, I’d already seen Raul’s dark side when we were negotiating our term sheet. The terms, to put it mildly, were pretty tough.

Warning sign number one of a bad investor: Bad terms.


Raul was fully aware that we had been raising money for two years, so he knew he had the leverage to force us into a really tough deal. And he did.

He sent the term sheet on Friday, and we had until Saturday at 5PM to agree. Raul and I were scheduled to talk about the terms at 3PM Saturday afternoon.

I called Raul at his home on Maui, and we started negotiating. Or at least I thought we were negotiating.

He started the conversation by saying, “There is no negotiation on this term sheet.”

I didn’t think he was serious. Everyone negotiates, right? I quickly learned that Raul was deadly serious.

Every term I tried adjusting, the answer was “No.” It was an exercise in futility.

Raul was probably laughing with amusement. Then, he laid the hammer down.

“Let’s see. It’s around 4:45PM in California. This term sheet explodes like a pumpkin at 5PM.

“Call me back at this number before 5PM if you accept our terms.”

Then the line went dead.

I called Gill. Gill said, “We’ve been trying to find a second investor for a while now. I think you should accept the terms if you want the company to go forward.”

I called Dave, my friend and advisor. Dave gave me the same advice.

So, I called Raul back and I accepted the deal.


Warning sign number two: Unexpected behavior


About two weeks before we formally closed the round, Raul called to let me know that he didn’t have the time to be on the board of our company. Instead, he was going to nominate the CEO of a previous company to represent their fund on the board.

Raul said he was planning on attending “at least” every other board meeting, and that we would meet before every board meeting.

“Why didn’t he tell us this at the outset?” I wondered.

I didn’t like it. I asked Raul if he had called Gill. He told me he was going to call Gill next.

Gill and I spoke about it later that evening. Gill was really unhappy about it. But we agreed that we should be okay because Raul was pledging to be involved.

In retrospect, not being on the board freed Raul of any fiduciary responsibilities to the company. He could act solely in the fund’s best interest. This would come back to be an issue later in the company’s history.


Warning sign number three: A tranche


Our Series A term sheet was for $12M. We would get $6M immediately and another $6M when we completed certain milestones.

Gill said to me, “They (the other fund) are really tough people. We’re going to be sitting here looking at each other if you don’t hit the milestones.”

I nodded my head in agreement.

The milestones were all related to “tape outs.” We had to complete five chip tape outs within 15 months of starting. Jeroen (my cofounder and VP Engineering) and I ran engineering so there was no way we would miss any of the tape out goals.

We completed the milestones in April, three months ahead of schedule. I still had to present to Raul’s partners, but the meeting went smoothly.


Warning sign number four: The partner on your deal lacks clout


Raul, even though he had been a successful VC for over 30 years at that point, recently joined this fund. Raul was also 77 years old when we closed our Series A.

One of the strange things about closing the deal with Raul’s fund was that we never had to present to the full partnership. It was just Raul and the Managing Partner (the head) of the fund.

When we presented to the Managing Partner, Raul had to continuously correct him. The Managing Partner had no clue what we were doing. It was clear he didn’t believe in our model or strategy.

The fund went ahead with the investment probably because Raul was in his honeymoon with the fund.

My biggest worry was that he would die before our Series B funding because we wouldn’t have any support inside the fund. Raul didn’t die, but his partners killed him.

I witnessed Raul’s death first hand. I was giving an update to Raul’s partners in advance of our Series B fundraising.

This time the update didn’t go well at all. The company was doing well, growing revenue and customers at a significant rate, but behind our original plan.

“What’s this? One of Raul’s companies is behind plan?” One of the partners said.

Before I could answer, Raul started answering the partner's question.

A sinking feeling hit me: I was watching Raul get massacred by his partners.

Sure enough, at our board meeting that Thursday, Raul announced that the fund wouldn’t put their pro-rata into the Series B. “Maybe we will put in $1M to raise the flag, but even that isn’t assured,” Raul said.

An investor not following its hand in your Series B is like a kiss of death.

That led to the most stressful year of my life.

Raul’s fund blocked the first term sheet we received. Then Raul’s fund blocked the next three term sheets we received. It wasn’t until we got Silicon Valley Bank to threaten Raul’s fund before they backed off and let the round go through.

Why was Raul’s fund acting this way? I found out after the fact that Raul had been asked to leave the fund and liquidate all his investments before he left. We were just collateral damage.

For more, read: What Are The Early Signs Your Startup Is In Trouble?


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