How to Avoid Financial Mistakes in Venture Capital Investments

Beware of Investors That CANT invest At my last startup, a VC signed a term sheet and spent months doing due diligence in exclusivity, which prevented us from raising from other VCs. In addition, it made us spend $25k on legal bills. Then....the VC ghosted us. We later learned that the VC never had any money to invest. They were fundraising themselves, only talked to us to include us in their "deal pipeline", so kinda like a reverse ponzi scheme 😡 On the flip side, on another occasion, a VC, told us upfront, "We are fundraising right now, but like what you're doing, let's sign the SAFE, it's quick and simple, and when we have the funds we'll wire it" - and you know what, they did! 💡Founder Advice: This Houdini act of disappearing is very typical of emerging managers, who themselves are actively raising, but still take meetings with founders. Both cases above were emerging managers, however, while the former was deceitful, the latter was honest and direct. During the meeting, always ask "Are you able to actively deploy capital in our timeline?"

One of my exited founders came to me for advice after losing $500k in his angel investments, and the companies are all dead. He fell into what I call "The Calibration Trap" All three had red flags that experienced angels immediately spotted. Primarily with the founders. "I thought building a $100M company meant I could spot the next winners," he told me last week, visibly shaken. "I couldn't have been more wrong." This is the most expensive mistake I see new angels make: believing your operational success gives you investing pattern recognition. It doesn't. After watching dozens of founders burn their hard-earned exits on terrible deals, I now have one non-negotiable rule: Hear at least 20 pitches from top-tier founders before writing your first check. Why? Because your "great startup" detector is uncalibrated until you've seen enough high-quality deals to establish a baseline. Professional VCs evaluate 1,000+ startups annually Experienced angels review 100+ opportunities per year New angels often make decisions after seeing just a few mediocre pitches This leads to catastrophically bad early investments. One founder-turned-angel who followed my advice told me: "After my calibration period, I realized I would have invested in completely different companies than what initially excited me. My first instincts were entirely wrong." For new angels, here's my advice: - Join an angel syndicate where you can observe without investing - Commit to zero investments for your first few dozen pitch meetings - Take notes on what appeals to you in each company - Watch which deals the experienced angels and VCs actually back The startups that seem amazing at first become obviously flawed once you've seen enough truly exceptional companies. Many unassuming founders with boring pitches will stand out for their fundamentals after you've seen dozens of comparable opportunities. This is why the best angels are typically the most patient ones. For founders: This explains the wildly inconsistent feedback from new angels. For new angels: If you're not willing to calibrate before deploying capital, you're just gambling with your exit money. #AngelInvesting #StartupInvestor #VentureCapital

A big mistake 90% of beginner angel investors make Chasing deal flow without a clear thesis. Many starting out are OBSESSED with seeing as many deals as possible. • FOMO-driven decisions • No focus on post-investment value-add • Packed calendar with random pitch meetings 3 steps for sharper decision-making, better risk management, and building your reputation as a value-add investor. 1. Define Your Expertise Zones: • Markets you understand deeply • Business models you've scaled before • Industries where you have operational experience 2. Create A Repeatable Diligence Process: • Minimum traction thresholds • Red flags that are an automatic "no" • Required reference calls with customers 3. Build Genuine Founder Relationships: • Offer help before asking for allocation • Share expertise and introductions freely • Become a trusted advisor Most investors never escape the "More deals = more winners” trap. But volume without focus is just gambling. I've learned to be the investor I needed when I was a founder: • Patient with capital • Rich in experience • Long-term in outlook This approach has led to 4 investments in startups that went on to become unicorns, and a portfolio that has outperforned the S&P 500. And now the best deals in my wheelhouse find me. Because founders know exactly what I'm looking for. (And the value I can add). Win by precision, not just participation.

Be careful investing into RUVs. I had a bad experience, here's what happened... I’ve been a long time investor and manager of Special Purpose Vehicles (SPVs) and a fan of the structure and access that they can provide. As an #angel, I’ve been able to invest into amazing pre-IPO companies that I never would have had direct access to and as part of Everywhere Ventures, we can keep our fund size small by sharing our follow-on pro-rata with other investors via our syndicate. When I first learned about Roll-Up Vehicles (RUVs), I was excited to see the same level of convenience, ease and access that I experienced investing in and managing SPVs extended to founders.  How it works is that founders get their own private SPV that allows up to 250 accredited investors (think small angels, operators, micro-funds) to invest into one vehicle that takes up just one line-item on the cap table. Founders don't need to worry about hiring lawyers for the RUV formation, tracking down investor accreditation, KYC or dealing with signatures and wires - that's all part of the RUV package. However, an often overlooked issue is that a manager of an SPV or RUV, has a fiduciary responsibility to the members of that vehicle. They need to make decisions on their behalf and often there are conflicting agendas where they need to be both a fiduciary to the members of the RUV as well as to the company itself - and there are times where those groups are not aligned. The most obvious misalignment is around pro-rata rights. Here’s the situation that I recently found myself in… I was a small investor in an RUV administered by a founder of a company. The RUV included pro-rata rights. A year later, as a competitive Seed round came together, there just wasn’t enough allocation for every investor that wanted to invest. So instead of honoring the RUV’s pro-rata rights, the founder waived those rights as he was entitled to do as manager of the RUV. The founder never consulted with any of the investors in the RUV and stopped responding when we (and other pre-seed investors) tried to contact him to discuss.   I was extremely disappointed in the founder for breaching his fiduciary duty to the members of the RUV and angry that he’d treat his first believers that way. Ultimately, I was most annoyed at myself for not educating myself properly on the mechanics of the RUV.  And pro-rata rights are the tip of the iceberg - in future rounds, the founder could make other decisions on behalf of the RUV around pay-to-plays and other follow-on scenarios. The bottom line is that I learned a hard lesson, it was a wake-up call to get up to speed about any new investment vehicle structure and do your own thorough research. Big thanks to Zachary Ginsburg and Alex Pattis for including me in the Last Money In Media newsletter this week 🙌🏽 https://lnkd.in/eFWEqgMK

Investor Red Flags: lessons from my experience 🚩 The companies I founded have raised funds across multiple rounds from a range of investors, from ultra-wealthy individuals to global corporations. Before that, in my previous life as an M&A lawyer, I was involved in M&A deals and IPOs worth hundreds of billions of dollars. This experience has taught me a thing or two about types of investors and which ones are better to avoid. Below, I outline five key red flags that signal trouble: 1. Third-Party Money Managers Investors who claim they’ll bring in someone else’s money are a major red flag. They often overstate their influence and make empty promises. Even if they connect you with the actual funder, they rarely add value and often complicate things. Avoid trusting those who rely on others - it rarely ends well. 2. Personal Guarantees Avoid investors who demand personal guarantees from founders. This is self-explanatory. Just trust me. 3. Past Dishonesty Be wary of investors who have a history of betraying others. A painful lesson I’ve learned from experience: if someone has acted dishonestly toward a third party, they are likely to do the same to you. Integrity should be non-negotiable when choosing partners. 4. Anything But Cash Some experienced entrepreneurs may offer expertise, networks, or brand association instead of cash. While valuable, these shouldn’t replace actual funding. Startups need capital to grow; the rest is a bonus. Accepting non-cash investments for equity can dilute your company without providing the resources you need. 5. Overcomplication and Excessive Demands Early-stage investment should be based on trust and understanding. Watch out for investors who bring too many consultants, demand excessive due diligence, or push for strict covenants. These can signal mistrust or plans to take control later, risking your business’s future. So, what’s my point? Choosing an investor is like entering a long-term partnership, built on trust and shared vision. Take the time to vet your investors thoroughly, understand where their funds come from, and ensure all agreements are clear and fair. A single misstep in this decision can put your company’s future at risk - choose wisely. P.S. This list is based on my personal journey. Others may have different experiences, but these points seem relevant to every fundraising round. P.P.S. Share your thoughts on how to make sure that you have the right partner for your company.

I’ve reviewed hundreds of deals—and seen the same mistakes trip up passive investors time and time again. Top 5: Chasing the highest IRR Big numbers look great, but what assumptions are baked in? High returns often mean high risk. Overlooking the operator The deal matters, but the who matters more. A great operator can navigate rough times. Ignoring the market If you don’t know where the rent growth is coming from, you’re just trusting a spreadsheet. Misunderstanding the capital stack Know where your money sits. Equity behind heavy debt or pref equity carries real risk. Not asking the right questions Everyone asks about upside. Start with: “What has to go wrong for me to lose money?” At Focused Capital, we invest our own money and underwrite with margin, not hope. Because smart investing is about reliable, risk-adjusted returns—not just chasing numbers. What other mistakes have you seen passive investors make? Comment below

I have invested in over 40+ startups as an angel investor. and have made tons of mistakes. Here are some of the mistakes that you can avoid: Mistake 1: Chasing the trends! While it’s true that the trend fever catches all over and investors are no different, always remember that you are ultimately building it for people and they only care if the product can solve their problem! Mistake 2: Not giving your investments time to grow When it comes to investing, time is important. Ideally, you should hold investments for as long as you can to maximize your returns because quick growth comes with a lot of risk. Mistake 3: Having unclear investing goals Don’t just raise funds because it makes you feel stable. Once you have a separate savings net set aside that you can fall back on, make sure you have clear goals as you go into investing. Mistake 4: The Founder’s equity split doesn’t affect anyone else. It is not the equal split per se that turns off the investors, it is that equal splits are a symptom of bigger issues with the company. Hence, Equity Splits Have Longer-Term Impacts. Mistake 5: Over-optimizing the process A lot of founders try to get way too fancy with tricks that they think will help them raise money. Be genuine, and focus on generating more trust with the investors. What more would you add to the list? #mistakes #entrepreneurship #funding

Here’s what went wrong and how to avoid it👇🏼 During a Series A financing, a mistake in an old convertible note almost killed the deal. Comment “CONVERTIBLE”, and I’ll send you a free SAFE Financing Checklist to avoid costly mistakes like this! As a startup lawyer, I see founders run into unexpected issues during financing rounds all the time. Here’s what went wrong: - The note converted at an 86% discount, which was steep but acceptable for early risk. - But it also gave the noteholder full Series A liquidation preferences (aka who gets paid first and how much when a company is sold or liquidated)—the same as new investors. - This meant they received a larger ownership stake and over $1M in liquidation preference, more than 5x their investment. New investors flagged this as a red flag, delaying the round and jeopardizing the startup’s future. To fix it, founders had to renegotiate the terms, converting the noteholder into a shadow series of preferred stock to reflect their actual investment terms. The takeaway? Convertibles, such as notes and SAFEs, can be a powerful tool—but if they’re not structured properly, they can: - Over-dilute founders. - Scare off investors. - Delay or derail your financing entirely. #startuplawyer #startupfounder