The Trials and Tribulations with Private Investors

In Singapore, other than the government, business angels & venture capitalists (series A is non-existent), private investors are another source which people can seek funding from. These private investors have most likely made their money through traditional industries and banks and usually have a portfolio in property and investments (hedge funds) which can make money. They differ from business angels and VCs because they have no prior expertise or experience in that technology area you are in. Sometimes, out of the blue, they will seek out a technology company to invest in. However, if you are a technology company, I don’t think that it is a good idea to seek out a private investor. Here are some reasons why a private investor can be a pain in the neck.

Here’s a horror story for you and it’s true with of course, the names and company taken off. A private investor wanted to invest in a technology company. After meeting the team behind the technology company and some negotiations, the investor agreed to put money into the company and signed a term sheet. Strangely, just before everything was about to close, the private investor pulled out from the deal, leaving the technology company in a lurch. So, here’s a warning note to most technology entrepreneurs, if you start a company and somewhere along the line, someone wants to introduce a private investor (the person can be a billionaire or famous, making money through very traditional commodities and real estate), you need to think twice. However, instead of bitching why these people can so mean, I will explain why these people are not good investors. Despite my mentor once told me never to reject money, I do share my concerns with private investors.

Here are some reasons why you should not put faith in private investors:

• They don’t understand your industry: In no way, private investors have very good knowledge about your industry, be it IT, biotechnology, communication and nanotechnology. They have no idea how your brilliant technology or business strategy can work to create markets which have not happened before. That’s the basic problem. If you pitch to the private investor, you must look at their body language carefully. The point is simple: if I have no idea about your industry, how can I put money in you? That comes to my next point.
• Everything is about profit and loss: Usually, private investors, after making money from their ventures, will turn to private bankers in investment banks. These private bankers will set up financial instruments in the bank to ensure that the private investors make a lot of money. If you do not know, a lot of private investors like real estate. In fact, recently, thanks to the building of the integrated resorts in Sentosa, real estate prices have been inflated till a few times more. Before market forces start correcting things, these private investors will make their money through their portfolio. These guys will not bother to look at any other worthwhile deals unless you can promise them a Google. Of course that does not work.
• They can turn out to be irrational and arrogant bigots: Of course, the real problem is how they treat your company. Depending on the background of the private investors, you can be short-changed pretty easily. Of course, not all private investors are like that, but you are warned. I do know of some good private investors who helped to build companies in the fashion and entertainment industry, because these guys know the business.

So, you are warned. Particularly in Asia, where there are lots of such private investors around, you need to do due diligence about the private investor you are dealing with. Sometimes, even though they may be rich, they can also be dodgy. Whenever you engage one, you must have this in mind, “Can my technology start-up make as much as money as that private banker’s financial instruments in an investment bank?” If you don’t think you can, my advice is better not to take money from a private investor.

Related links:
Quin Wills, The Growing Pains of (Technology) Investment, Business Weekly: Venture Blog

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