While reviewing the presentation from a U.S. company raising a Series B or C financing, I quickly jumped into the team description and spotted a mistake in the academic credentials of one member of the executive team – it stated that the team member acquired a J.D. (or law degree) from the very same college I attended. I identified this error since my alma mater, the last time I checked, does not grant law degrees, just B.A.’s (with some smaller population of M.A. degrees).
In earlier blogs, I do state that the average investor looks for mistakes. If the startup is looking for any funding, the startup team must review its materials no different from a company filing an S-1 registration. Any mistake, however small, in an S-1 registration could represent expensive, potential shareholder lawsuits. Why? Any potential shareholder would conclude that the company misrepresents its critical information to attract funding. And, in the startup environment, the same sensibility arises from a potential investor.
I don’t see that any different from the level of detail should apply to even startup companies seeking capital.
What would be my initial concern? First, that the name of the team member was simply a “name,” inserted into the team package, who is not truly managing the day to day operations of the company. That individual never bothered to check his background C.V. in this investment package. And, if that is true, what about the other team members? And there is the possibility that the team member is not even aware of the insertion of his name within the investment package.
Another way to look at this mindset comes from a friend, who did considerable due diligence on early-stage investments in Moscow and his comments to me on his experience there. He related to me that whenever a person visits his Moscow office for an interview for a potential investment, he can claim that he works at a company that may or may not exist, or has a position in a company that may or may not exist, and provides a name that may or may not exist. Again, as I have related before, fundraising is all about credibility.
The banker who invited me remarked that the error was corrected, but how will I forget a presentation that includes a “pink elephant”?
Another mistake or misrepresentation originated from an Indian e-commerce company seeking an expansion round of capital. One slide contained the logos of several well-known U.S. companies like Fedex, claiming a list of clients. During the conference call with the CEO, I asked whether Fedex and other brand name companies were actual clients. (I became suspicious since its revenues did not reflect that customer base.) The CEO admitted that they were not clients. I demanded that he remove those logos.
And I recalled my legal work with S-1 registrations on my responsibility to make sure that the information contained in the S-1 was true and correct. My concern is the possible legal headache of shareholder lawsuits originating from any kind of misrepresentation. In this case of this e-commerce company, any sophisticated investor can identify these errata. And then he/she would pass on the deal.
Whether the startup company is seeking $500k or $5 million. The accuracy and veracity of the presentation materials do matter. I have encountered companies facing frustrating months of reaching out to investors without looking into their own presentations. One Silicon Valley company reached to over 80 VC firms with faulty materials in its analysis of market shares and growth potentials. I asked the founder, did anyone reply? He said “no”. Now he wasted considerable time and resources that would have been better off by vetting the accuracy of the presentation materials. He returned to work again for Apple.