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5 investor red flags to look out for, according to this University of Houston expert

Keep an eye out for these warning signs when looking for funding. Miguel Tovar/University of Houston

Venture capitalists give you plenty of reason to be on the look out for investor red flags.

In The Parable of the Scorpion and the Frog, the frog entrusts the scorpion not to sting it while it helps the scorpion cross a lake. The scorpion promises not to sting the frog, reasoning that both would drown. The scorpion stung the frog anyway. As a result, both drowned. The moral of the story is that a scorpion, like any animal, is true to its nature.

Think of venture capitalists as scorpions. They are constantly trying to undermine established terms in order to either avoid a financial downside, or collect on the financial upside, even at a startup's expense. As a result, they will not think twice about screwing you over.

Venture capitalists have a clear institutional objective: if your company is successful, they collect as much money as they can based on the agreed upon terms. On the other hand, if your company falls flat on its rear, venture capitalists will look to avoid losing money. At all costs. Even if it means bending the terms of your agreement and hurting your company further.

Here are the top five red flags to look out for from a venture capitalist.

Bad terms

Firstly, there are many times when a bad investor will strong-arm a company founder into a tough deal. If the investor even hints that there will be no room for negotiation, that's a definite red flag. You have a right to negotiate certain terms and request flexibility. The best investors will want to work with you because it's unlikely they'll want a sour relationship with their investment. If your investor seems to say "no" a lot to you, how much do they really care about your company's growth?

Unpredictable behavior

Any investor that exhibits unexpected behavior is sure to give you tons of headaches down the road. Imagine after agreeing to terms, your new investor decides he or she do not want to be on your company's board all of the sudden. Either because they don't have the time or just don't want the responsibility. Instead, they would hire an executive from another company to represent their interest on your company's board. Why didn't they tell you this beforehand? Now you'll have to adjust to this sudden change of heart. Consequently, your company will have to adjust, too.

Strict monogamy

Okay, so your relationship with your investor is not a romantic one. That's exactly why it should be okay to work with other investors. If your venture capitalist tries to discourage you from doing that, it shows a glaring insecurity. Multiple investors means more money for your company. Any investor that tries to keep you from working with other investors probably does not have your startup's best interest in mind.

Rotating door of CEOs

If an investor has a history of firing founders or CEOs too fast, it could show that they do not have the patience required to allow a startup to grow. Moreover, bad investors will overreact to a missed milestone (like under-performing for a quarter) and fire a CEO. So, seek an investor that has a reputation of working with founders, even through those bumps in the road.

Dominating discussions

Lastly, any potential investor that completely dominates a discussion does not leave room for other ideas and different perspectives to be brought to the table. Your company meetings should brainstorming sessions and strategic conversations where everyone has input.

Therefore, any one-sided discussion about company operations is sure to leave a bad taste in everyone else's mouths. In short, if your discussions with a potential investor are one-way streets where they are talking way more than they are listening, what do you think board meetings will be like with them at the helm?

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This article originally appeared on the University of Houston's The Big Idea.

Rene Cantu is the writer and editor at UH Division of Research.

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Building Houston

 
 

Amy Chronis, who oversees the Houston office for Deloitte, has a new role she will be adding on to her plate. Photo courtesy Deloitte/AlexandersPortraits.com

Amy Chronis has had a big year. First, she took over as the Greater Houston Partnership's 2021 chair. And on February 25 she was named a vice chairman of Deloitte LLP and leader of its oil, gas, and chemicals sector.

In her new role, Chronis will lead the overall strategic direction of Deloitte's oil and gas arm while she continues to serve as managing partner of the company's Houston office. She succeeds Duane Dickson, who will be retiring from the leadership role in May.

Chronis is a licensed CPA and known to be a thought leader in aspects of the energy transition with a 30-year background in the oil and gas, technology, and manufacturing industries.

"Our industry is at a crossroads and going through one of the most challenging business environments on record," Chronis said in a statement. "It's an honor to take on this role at such a pivotal time for our oil, gas and chemicals clients engaging in the energy transition and emerging from the pandemic. I look forward to helping them navigate the winding road ahead."

Chronis spoke with InnovationMap earlier this year about Houston's evolving image and impressive innovation in the health, space, and energy industries that often gets overlooked.

"Houston needs to step up and state our case as often as possible," she told InnovationMap last month.

Chronis is also an advocate for inclusion in the workplace. She co-leads the Houston cohort of Deloitte's Board Ready Women and Women on Boards programs and will aim to advance Deloitte's diversity, equity, and inclusion efforts in her new role.

Click here to read a run down of Chronis's address to the GHP earlier this year.

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