Founders Should Avoid Bad Investors
Summary
Bad investors are driven by loss aversion, but startup investing requires accepting that most seed-stage deals go to zero—the expectation. Good investors make quick decisions based on team conviction and avoid micromanaging; bad investors bog founders down with endless diligence and control, ultimately destroying company value.
Key Takeaways
- At seed stage, expect most deals to fail to zero; one deal with 1000x returns compensates for all losses. Bad investors who aren't comfortable with this reality become skittish and paralyze decision-making.
- Bad investor behavior stems from loss aversion and manifests as endless diligence, looking for obscure risks. If you can't identify 5 reasons a company could fail, you lack insight—it's either a scam or you're blind to something.
- Controlling founders on the board (especially junior partners with career risk tied to your deal) is destructive. Good investors bet on the team, support them, and accept that bad teams won't be saved by investor management.
- The best angel investors make quick conviction-based decisions with minimal deliberation, creating a pleasant founder experience. Speed and clarity signal confidence in the team rather than exhaustive risk analysis.
- Startup investing is fundamentally different from real estate or stock market investing where you must avoid losses. The portfolio math requires embracing 90% failures to capture the 1 outlier success—founders should screen for investors who understand this.
Related topics
Transcript Excerpt
What I'm looking for is someone who's going to start a trillion-dollar company, and I've never started a trillion-dollar company. So, I'm looking for someone better than myself. So, [music] my assumption is like I want to be convinced that actually this person knows better than I do. And [music] so, that's why I'm giving them the money, not cuz I'm the expert, but because they're the expert. >> [music] >> All right, this is Dalton and PB from Standard Capital. And today we're going to talk about what is a bad investor? We're going to try to set up some nomenclature for for bad investors, some terminology, and give some examples. Um I guess to start with, when I was a founder um and I didn't know anything I didn't really understand the um set of options. Uh especially at the extremes of wha…