3 ways to spot predatory startup investors in your market

Hi everyone. This is Leighton, Tech in Asia’s Indonesia editor. One of the things I feel is a problem which doesn’t get addressed enough in Jakarta is the existence of predatory investors and venture capitalists.

I won’t name names, but in my mind, these include but may not be limited to investors who offer small sums of money in exchange for equity stakes that are proportionally too large in early stage startups. I’ve spoken to entrepreneurs who’ve been offered term sheets in the ballpark of US$20,000 for a 10 percent equity share of their company even after the site has a relatively proven business model, and is pulling in several million monthly visits with clear plans to monetize soon.

Such a proportion might make sense for a pre product startup that’s still in ideation phase, but for a firm that already shows healthy traction, I honestly might interpret that as the investor trying to skin the entrepreneur alive.

The question I hope you guys will help answer is: What are three ways we can we spot predatory investors in your markets?

I think predatory investors exist in all markets, but in emerging markets like Indonesia – and perhaps the Philippines – they’re likely able to fly under the radar more easily. They also get to enjoy the lack of experience from local founders; people who are stoked to be getting investor attention, but may not question whether they’re getting financially screwed.

I’d like to invite you all to share three ways to spot predatory investors in your own markets, but just to kick things off, I’ll go ahead and start with Indonesia:

1. The investor proposes an ownership split that gives them more than 50 percent in your early stage startup. Essentially, the founder would hand over controlling majority of the company in exchange for what would otherwise be seed funding.

2. The investor only offers to fund your company if you make radical changes to your business. This could be changing the core offering and even the name. Basically, this could mean the investor wants to build their own startup but needs a puppet or proxy to do so. In this case, the investor is more interested in plugging a warm body into their own machine rather than betting on an entrepreneur.

3. The investor requires an early stage tech founder to first start monetizing before they can invest. This could indicate that the investor is only interested in turning a short-term profit and is not really interested in helping the founder grow and build the company toward a $1B valuation.

(Disclaimer: For community posts like this, my views are my own and don’t necessarily represent those of Tech in Asia.)

Lead image by Adrian Korte.