Investment Horror Stories: Lessons on Due Diligence, Fundraising Mistakes & Startup Struggles

In this episode, investor club leaders share cautionary tales from their personal investment journeys. They delve into horror stories where deals went south, offering key insights and valuable lessons learned along the way. Topics include the importance of timing and market cycles, the dangers of over-promising on deals, and the significance of due diligence and clean documentation. From startup struggles to poor decision-making in real estate and AI ventures, these stories underscore the critical need for strategic thinking, strong relationships, and understanding market dynamics when raising or investing capital. Tune in to hear firsthand experiences and actionable advice that could save you from making the same mistakes in your own investments.

Key Takeaways:

- The importance of seizing opportunities in a frothy fundraising environment

- Why founders should act quickly during strong fundraising cycles, even when market conditions are uncertain

- The value of concise and clear communication when pitching investment opportunities

- How poor due diligence and lack of knowledge can lead to costly mistakes

- The risks of over-promising and aiming for deals outside of your expertise or lane

This episode offers a mix of investor insights and cautionary advice, perfect for anyone looking to avoid pitfalls in capital raising or investment.

Transcript

- Okay, now this next question, popcorn style, anyone could jump in and hopefully
multiple will jump in. So maybe, I don't know if I wanna call it a horror story,
but maybe you could speak to an example, you don't have to mention any names, where
you say probably wasn't a good way that they went about doing this, or it could
even have been an opportunity that unfortunately went south.
- Yes, I have a story. So we invested early in this company called Rebel Systems.
And they really were the next big thing. The media said they're the next big thing.
The founder who, there's two founders, one is a woman, one is a man. The woman is
a CEO. And, you know, in public relations, you're manufacturing the news.
So sometimes founders read it and it was a height of fundraising and it was brought
to my attention that she didn't want to go out and raise money at that stage
because she felt that she was gonna get a higher evaluation as she closes this
other deal and the company's gonna be much more valuable and so many people around
her try to explain to her well the market is here right now if it changes it's
gonna crush your valuation. Oh no, you don't understand this and that. I understand,
I agree with you. Try to agree with the founder always. Unfortunately, the market
did change. The valuation was close to a billion, went to $350 million. The board,
unfortunately, blocked her from getting funding because they wanted her off the board.
They wanted the other co -founder off the board. There was no other option,
especially at the later stage of Series C, the big checks,
and they raise money from a private equity firm out of New York. I don't want to
say their name, you guys can all research it. And their motto is to take a company
and kind of think of it as a corporate raider, chop it up, reduce the staff, and
turn around and sell it to make a profit. Nothing wrong with that, but it's not
for early investors to something that we want to hear. So the only message that I'm
trying to communicate, she did get a big payout. He got a big payout. The company
went on to be acquired less than what we expected, 250 million.
And the message that I remember there is don't believe the news.
If the funding cycle is hot, that's the time to strike. Not sit back and look at
trying to build your business better because you can't control the market once the
market changes the market changes And that's one thing that I would suggest to
founders if there's a frothy fundraising time like right now Yes, work on your
business and it's block out time to reach out right now and see what you can
because valuations from my experience as a I'm not only an angel investor, but we
had a fund for ten years Ups and downs and no one sees it in the news. Valuations
are high, which think of it as the value of a piece of real estate, then it goes
down and it goes up and it goes down. And it's not really based on any third
party data, it's based on investors deciding what percentage they want to invest in.
So if you can get the money, get it now because it always changes. Thanks. I'd
like to answer that on a broader scale. We've had a lot of horror stories of
companies that didn't make it. We also have a lot of companies that have come
through that claim that they would exit in three to five years and it's been eight
years and my money's still with them and all the executives are making good money
so they have no reason to want to exit anytime soon so we pay more attention to
those exits. But one of the most horrifying things for me is coming to an event
like this, or events that we put on ourselves and having an entrepreneur come up to
me and introduce their company and go into a 30 -minute spiel, or what they plan to
be 30 minutes, they've lost me after a minute because I have no idea what they're
doing. So my advice to all the entrepreneurs, keep your stories short. And like
we're talking about, we're trying to keep our answers to two to three minutes. The
only way to really capture somebody's attention is to know what you're talking about.
And if you can't say it in one minute, you don't know what you're doing. So try
to keep it short and sweet. - Great message. Dr. Kerwin. - Sure. The example I'll
give is someone who actually wasn't keep us gain. We were down there and had a
nice sounding deal. And the problem with investing investing at our level is we
don't have the resources to do background checks and the diligence that some other
people can and just to make a long story short the deadline was going to be
January 1st to invest and so I heard Lee called up another member of our group end
of December and the sponsor had told me he called that person for an endorsement
and they didn't endorse moreover they had taken a look at a number of records and
actively discouraged me from investing because a lot of the information wasn't correct
as they were representing it. So I'm glad that I kept out of that deal. Excellent.
Wyatt? Yeah, sure. One of our prominent members, I'll save some names on that one,
but invested as a gap funder on some real estate out of state. And all the
paperwork was done basically for a Tennessee LLC,
a Tennessee entity, right? But the state that was invested in was New York. And
that's completely different legal structure, right? And so you don't, I I think Jill
mentioned it earlier, is that when you have to do the due diligence on what the
local municipality, what the state wants, I have constant conversations,
we do with my co -director Jennifer and I have constant conversations with people
that need to know about the lunches, right? If you're looking to do some
development, you talk to the council member and in Nashville area you go to a lunch
and they tell you what they want and maybe they don't like vinyl siding and they'll
tell you very quickly that's not what we want. Okay sounds good so don't put that
in any paperwork because I have to sell it for you later on in front of the
council. So those kind of conversations are super important if you don't know it can
cost you some money so there's there you go. Excellent that's a good message why I
didn't and I'll say cleanliness of the documentation. I reviewed thousands of private
placement memorandums and operating agreements as we hold those documents as a
custodian. We don't do due diligence, but I look at some of these documents and I'm
just, I'm not in a position to tell someone not to make that investment, but when
I look at a document and there's spelling errors, to me that's a huge red flag.
Again, I can't stop people from making those decisions, and maybe it works out, but
if it doesn't work out, weren't there red flags from the very beginning? Richard? >>
Yeah, I think just real quick, maybe when people are thinking that saying that a
deal is guaranteed, which is kind of illegal to say unless you have an insurance
product that is licensed and actually is guaranteed, it's a sign that they're brand
new to the game. Sometimes it's someone who's never raise capital and they're trying
to raise a billion dollars or $200 million or they're trying to raise capital for
six different deals and one is a pro sports team and one's a huge building for a
billion dollar ground -up development and and all these different things that are
probably never happened. Some people pull it off like Steve Schwarzman, founder of
Blackstone. He raised a billion dollar fund but he came out of one of the biggest
banks with a big reputation. Michael Jordan wanted to play pro baseball. He didn't
go straight to pro. He had to play in minors, work his way up and that's Michael
Jordan's work ethic and talent and people entering capital raising think they're going
to go to the major leagues and knock out multiple hundred million dollar billion
dollar deals with zero experience and they learn the hard way that that doesn't work
too much so people at over promise promise the moon don't don't leave themselves
room to over deliver and they start way too high and they should start smaller and
grow organically much much of the time and I'll add one quick anecdote my background
is in real estate I've been doing it for over 20 years, and a lot of you have
heard me talk about it, do a lot of self -directed Roth and HSA deals in real
estate, private money loans, a lot of the types of opportunities that you probably
work with local investors in Tennessee. I'm from Ohio, though, and about two years
ago, I had an opportunity to invest in a startup, and it's an AI -based educational
company. I got really excited about it. I've never done any investing outside of
real estate. You guys know where I'm going with this? It's going terribly bad.
Terribly bad. And so that was my lesson. I think I needed that lesson,
that I'm very good in specific areas. I have very specific lanes that I follow in.
And every time I deviate out of that lane, it always ends poorly for me. I'm the
most technologically declined individual. I know nothing about AI other than what I've
learned at this conference so far. So why do I have any business investing in that
area? Now, if I start to develop a team and educate myself more, maybe I'll have a
little bit more confidence and I'll have a little bit better track record of being
able to do that. So again, that's my story.