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3 Scandal Signs You Need to Avoid Before Signing On With an Investor

Posted Thursday August 17th, 2017 3 Scandal Signs You Need to Avoid Before Signing On With an Investor

This article originally appeared in Inc. If you like this article,

Whenever I meet a fellow bootstrapping entrepreneur, I feel the need to high-five them on the spot. We're a rare breed in a world where OPM -- "Other People's Money" -- is the most coveted acronym in life as a startup.

Sure, using other people's money is alluring, particularly when there are an unprecedented number of capital sources in today's market -- from private equity to Small Business Association loans, from traditional banks to home equity lines of credit, and from mini-IPOs to venture capital.

When it comes to securing funding for your business dream, many entrepreneurs throw themselves at whatever money they can get. But, it can sometimes be more unsettling to actually get funded than it would be to have never received funding at all.

Take, for instance, the recent scandal at Binary Capital, in which one of the co-founders was sued for his predatory behavior towards women. That PR nightmare not only brought down the venture firm itself, but it also left some of the companies associated with the VC fund in a far more uncertain future, without the capital partner they thought they had.

That makes your choice of VC firm one of the most important decisions you can make as a startup founder. To better understand how to properly vet a venture capital firm, I reached out to a new friend, Jason Mendelson, who is a co-founder and managing director at the venture capital firm Foundry Group, based in beautiful Boulder, Colorado.

Here are his three ways to make sure your investors are trustworthy, before you sign on the dotted line:

1. Vet the people, not the profits.

Mendelson recommends you "look at what the partners do in their spare time. Don't just check their references -- see what they do when the spotlight isn't on them." Mendelson recommends checking their friends on social media, looking through their social profiles, and looking for behavior that seems inappropriate or in any way contrary to your own values.

2. Interview current startups in the portfolio.

Mendelson recommends that you "do interviews within the portfolio to make sure you're getting a diverse cross-section." If you're not seeing diversity of age, race, gender and more, ask why.

Furthermore, make sure you understand the length of time that startups typically stay affiliated with the fund. "My average relationship with CEOs lasts longer than the average marriage in this country," Mendelson said. "Yes, it's business, but the business is personal -- so make sure there's a true business love between yourself and your prospective funding partner."

3. Interview current employees within the fund.

"So many people change jobs frequently at VCs," Mendelson commented, "so ask why people have left or why people have joined." Just like with the entrepreneurs, longevity within the ranks of the VC partners and employees is a great sign of stability and positive values.

As I like to say in life and in business, there's a price and there's a cost. It's not always a great idea to take the money, no matter how badly you need it. Take your time, do your due diligence, and ensure that you choose a funding source that matches your core values.

As Mendelson pointed out, "good business is not just about good profits; it's also about good people."

Sounds more than good to me.