A bad investor can cost a founder much more than the time it takes to raise money. The meetings, demands, and attempts to control the company can continue long after the check clears. In this conversation, Dalton Caldwell and Paul Buchheit explain how founders can spot those problems before taking someone’s money.
PB traces much of the behavior to fear of loss. Early-stage investing means accepting that many investments will fail, while a few exceptional outcomes can make up for the losses. An investor who cannot accept that uncertainty may try to eliminate it through endless diligence or by telling founders how to run the company. Neither solves the underlying risk.
A complicated process is not necessarily a thoughtful one. Asking a two-person startup for detailed financial projections can look responsible without answering the important questions: Are the founders building something people want? Could it become a huge company? Good investors focus their attention on what will determine the outcome.
Dalton offers a simple way to screen an angel investor: ask which companies they invested in over the past year and how large the checks were. Then talk to those founders. Someone willing to keep taking meetings is not necessarily someone with money to invest. Recent investments and founder references are more useful than enthusiasm alone.
The relationship matters after the investment, too. An investor should respect the founder’s expertise rather than assume that success in another industry makes them qualified to run the startup. PB’s approach is to look for founders who understand the opportunity better than he does. That is the reason to back them, not a problem to correct.
For investors, the corresponding discipline is to diversify and accept the possibility of losing each check. Putting all the money into one startup does not make its future more predictable. Nor does passing an investor’s anxiety on to the founder make the company more likely to succeed.
Speed is another signal. Dalton and PB argue that investors with unnecessarily slow processes drive strong founders toward people who can make decisions. What looks like extra caution can leave those investors choosing from companies with fewer alternatives.
The practical lesson for founders is to evaluate the investor as well as the offer. Look for someone who has money to invest, makes clear decisions, understands the risk, and supports the team without trying to become its manager.