30. The Dark Side of VC | Predatory Investor Practices (Joanne Wilson)

Due Diligence Podcast DownloadNick Moran Angel List

Joanne Wilson joins Nick on The Full Ratchet to discuss predatory investor practices and the dark side of venure, including:

  • Predatory_Investors_Joanne_WilsonOn the founder-side…  What are some of the activities you’ve seen from early-stage investors, that are predatory toward founders?
  • What are some of the major differences between investor practices of the mid-90’s and today?
  • What actionable measures would you recommend founders take in order to help prevent getting taken advantage of?
  • Moving to the investor-side.  What are some of the things that later-stage VCs will do to eliminate or water-out an angel’s equity position?
  • What can early-stage angels do to prevent this from happening?
  • How has your approach evolved throughout your investing history to position you and your portfolio companies for success?
  • Generally, what is your take on the gender balance in venture, how has it changed and what specific things are you involved in to help promote the role of women?

Itunes:  http://bit.ly/1E07t7N

Direct-audio:  http://bit.ly/1CeW7e2

Guest Links:

Key Takeaways:


1- Stacked Notes


 Joanne talked about this emerging occurence of startups that raise a convertible, at a certain cap, and subsequently proceed to raise additional convertibles at higher and higher caps instead of doing a traditional priced round.  The challenge for early investors is that, upon conversion, the original terms are no longer fixed and the cap does not apply as initially laid out.  Depending on the number of convertibles, in the stack, and the valuation cap amounts and/or discounts at each, the riskiest capital may not be rewarded for the risk taken.  And it’s often not the founders that are trying to hurt their early investors but rather the lead VC that comes in at a subsequent round.  If they see an opportunity to lower the eventual equity of other investors, they may structure the round as such.  All angels should be very wary of this as the stacked convertible seems to be becoming more and more common.  As Joanne advised, a side note or document that protects the seed-investor from cap dilution at a subsequent convertible raise can be a great way to protect against this.


2- How much to sell?


Joanne had a simple recommendation for founders, when it comes to the amount of equity sold at each round…  she said:  you only want to sell 20% of your company at each round.”  We’ve talked about this in the past but Joanne’s perspective was unique.  If you think about it, every startup that doesn’t exit fails b/c it runs out of money.  There are myriad reasons why a startup runs out of money, but why let an over-inflated valuation be one?  I wish there was a study on this so that I could site some data but I’d love to see figures on the number of startups that have product-market fit, a viable business model, a compelling growth trajectory but have to wind the business down due to an inability to raise b/c of a previous inflated valuation.  Of course, the alternative to setting too high a valuation to get more money, is to set the appropriate valuation but to give away more equity for more cash.  So in this case the founders are going to sell a higher percentage of equity in the round at hand.  Again, if there’s not enough equity in later rounds for investors, they will pass.  And if the founder’s continue to give away too much, the cap table may be unfixable, if they don’t have enough of the business to stay motivated and/or there’s nothing left to sell in exchange for equity.


3- The Role of Women as a Consumer


I’ve have seen some stats on this now from a few startups about the % of online transactions completed by women vs. men.  Joanne mentioned that about 85% of all online transactions are completed or influenced by women.  This not a recommendation to ignore men when it comes e-commerce.  But whether your target user is an adult woman, man or a child, you’d be neglecting a major aspect of user acquisition to ignore the role of women as a purchaser.  In the tip of the week on episode six, we discussed the importance of startups that know the difference between users and purchasers.  Clearly, if you are reviewing a startup in e-commerce, it is evident that regardless of target market, the role of women as a purchaser must be well understood.


Tip of the Week:   The Value-Added Investor