Not all investors are created equal. Some add lots of operational value, while others have deep pockets that can help get your company out of a bind down the road. But there are also social dimensions to keep in mind when forming a syndicate.
Investors are people. And when you get multiple people to collaborate you have a group. Groups are subject to dynamics that change the way individuals would otherwise make decisions.
If you’ve ever worked on a class project or been on a team at work you’ve probably seen this. Leadership roles naturally develop, internal politics arise and emotions can be exacerbated. Unintentionally, a social structure will develop and affect people’s behavior.
This dynamic usually works out fine for companies. However, since the group can become so extremely interconnected, if you add in a dash of poison investor, it can ruin the whole batch and create a dysfunctional syndicate. Poison investors are investors who don’t understand the long game (both temporally and strategically) of the venture business. They’re ill-equipped to handle the ups and downs that startups experience. And, when the going gets tough, they freak out…often becoming mean spirited.
When an investor becomes confrontational they can do more than hurt the feelings of founders – they can spread rumors and hysteria amongst the rest of the syndicate, confusing people and driving toward a dysfunctional decision making process.
They scary part is that poison investors can write big or small checks and they can even seem easy going at first. The best way to avoid them is to do reference checks and to use your gut. Do whatever you need to do, but don’t let poison investors invest in your company. You will regret it.