Monday, February 22, 2016

How to find good investors and avoid the startup sharks (nope VCs aren't the sharks)

After four years as a co-founder of, I can confirm that the startup ocean is infested with sharks. However, in our experience, none of these sharks are actual venture capitalists. They are not investors but parasites and scammers posing as investors or promising to help you connect with real VCs in exchange for cash/equity.

Here's a good example of someone who has wasted months of our time. Please do read about a classic scam artist John Spangenberg.

Spangenberg prefers to go by "Johnny" and posed as an impact investor with an active fund interested in investing in He said exactly what we wanted to hear, and from November 2014 through the end of February 2015, asked for numerous meetings and documents as part of due diligence. It took these three months for us to realize that he was wasting our time and to ask him to never contact us again (full exchange below). That was two months before the above article. 

I have been planning for a year now to write this simple guide for finding good investors. After bumping into the expose of Johnny today, I can't delay it any more.

The truth is that there is no formula for matching startups and investors. No matter how good your company, you have to talk to many to find the right fit. But from the scores of VCs I have spoken to, there is a common theme to the good ones:

  1. They value your time and ask good questions.
  2. The questions match your stage of the company.
  3. Whether or not they invest, you typically learn from the conversations with them and can use the feedback to improve your presentation and company (like getting negative review on an academic paper, it's important to use the rejection/criticism to improve your paper rather than to lash out at the reviewers).
  4. They quickly let you know what they are looking for, whether you fit, and if your startup is too early, what needs to happen before they will invest. (Quickly is usually a matter of 1-4 weeks.)

On the flip side, below is a list of characters and organizations to avoid like the plague. Like all first-time founders, we have lost precious days on these parasites, and I detail the below to hopefully save some others for wasting just as much.

  1. Conferences and investment groups that deceptively charge startups exorbitant fees for the honor of meeting potential investors (I've written before about Web Summit and the Keiretsu Form in Hey startup parasites! We don't have time for you.)
  2. Introducers. These are folks who promise to connect you to VCs in exchange for equity, a retainer, and often a percentage of your raised round. RUN RUN RUN from them.
  3. Investors who are meeting with you just because they invested in a competing startup and want insider information.
  4. Pseudo-investors who do not have actual cash or an active fund (see more on Johnny below).
  5. Investors who won't quickly tell you "yes/no" but are dragging you through making charts and documents for them that are entirely irrelevant for your stage of the company (for example, financial projections and time-to-profit graphs before you have started building your product).
  6. Scam accelerators (careful here - there are some very good accelerators and a sea of shitty ones.)
We have been approached and distracted by a few in each of the categories above. Because of a good bullshit detector, we have never lost any equity or cash to these leeches. But we did lose a lot of time. Time, to a startup, is as valuable as cash - guard this precious resource and avoid the parasites.

Founders and investors, please share your tips on how to find the good ones and avoid the fraudsters. Please comment below (or on this Twitter thread, and I will add the advice to the post).

[Below is the e-mail exchange with Johnny once we realized that he is wasting our time.]


From: Lenny Teytelman
Date: Fri, Feb 6, 2015 at 8:44 PM
To: John Spangenberg

Dear Johnny,

Thank you for taking the time to connect with Irina today. I hope that you now have enough information to decide whether or not you want to include in the tentative list of companies for the fund that you are raising. 

I hope that once you raise the fund, we can reconnect, update you on's progress, and help you make the final decision on whether or not is the right fit for your fund.

I also hope you are not offended by the bluntness of this e-mail. It is just that startups can ill-afford tentative conversations with investors who do not at the moment have an active fund and are in a position to to make the yes/no call. Our board and advisors have repeatedly cautioned us not to get distracted by potential VCs who are interested in but are not able to make the funding call at the moment. I tried to communicate as much to you, but I must have not done a good job. I am sorry about that.

Kind regards,


P.S. I also want to share my perspective on cash-flow projections. I know they are a normal part of business school, but they are inappropriate for young startups. We have raised $800K in the last 2.5 years. Neither the angels nor the VC group that invested asked for cash-flow. Only one potential angel asked us for 5-year spreadsheets, and not surprisingly, he bailed and chose not to invest at the last second. Below is the message I sent to him back in 2012.

Dear ...,

We enjoyed our phone conversation and really appreciate your advice.  Attached is a revised 5-year projection model. Since we cannot realistically estimate the risk of our company, we applied discount rates typically used by VCs when valuing early stage startups.  Please note that we are not at the stage to be valued by VCs yet.

While we agree that this is a good exercise, we want to caution against over-interpreting the numbers.  Take everything in these models with a HUGE grain of salt.  There are just too many assumptions.  We are estimating total number of protocols, job postings, ads sales, our expenses, and on and on.  These are important and solid exercises.  They show what the revenue model is and why we are likely to strike gold.  But they are too speculative to take seriously now.

Of course, it is critical to have a good business model.  But our budget to get there and the actual revenue are a moot point.  For classic manufacturing and service startups, such calculations are essential and realistic.  For tech. startups, they are mostly irrelevant.  That's because the most likely scenario is that a year or two from now, once we have the repository, user base, and traffic, we will be bought by Nature Publishing Group, or Merck, or ResearchGate, or Google  without getting a single dollar of revenue.

It may sound delusional, but we would argue that for an angel investor, that is essentially the only scenario that matters.  Most tech. startups fail.  The return comes from a 10-15% of the ones that succeed, but those that succeed, do so wildly.  Angel investors make 75% of their profits from the 7% of companies that hit the ball out of the park.  The goal of the angel investor is to invest in the one company out of many that will give a 10-30x return. 

Can we guarantee success?  Of course not!  If we could, we wouldn't be talking to investors.  Angel investors take a huge risk, but they do so because of the insane possible return.  

Obviously, we think we have a good shot at this.  Hence the initial seed funding of $100K from us.  Hence Alexei quitting his lucrative job and plunging in full time.  We know that there is risk and we are willing to bet on this company.  We are the main angel investors here, in addition to being the founders.

From: Johnny
Date: Sun, Feb 8, 2015 at 5:47 PM
To: Lenny Teytelman

Dear Lenny - your friends are absolutely right. Both investor and investee as principal and agent need to engage in a constant due diligence. Trust is not a given but something that has to be earned over time, sometimes through tribes and tribulations. Working together engine and gasoline in an symbiotic relationship has to be compelling for both sides of the transaction. 

Will soon provide all potential impact investees at sky deck with an overview of our Stanford-Berkeley incubator impact funds, likely structured as a $50m public mutual funds and traded on the stock markets. 

Meanwhile all the best in elevating protocol.sio into the next growth level, expectantly profitable growth. 

As to money questions, I respectfully disagree with your (casuistic) and somewhat arrogantly diagnosis. Finance is the semantics of business. Value is defined by McKinsey as the future net inflow of cash. The 2000 internet bubble showed that eyeballs can never substitute coldhearted cash so that inspecting financial projection has become a legitimate part of any proper due diligence. I'm sure you  will get used to it if and when you mature your interesting business. 

All the very best - Johnny

From: Lenny Teytelman
Date: Sun, Feb 8, 2015 at 6:22 PM
To: Johnny 

Dear Johnny,

I agree that a business model which is "let's get users" is often a bad approach to a startup. As you know, we are not in that group. It is critical for a startup to have a solid business model and to take steps towards validating it and attaining revenue.

Where we disagree is the value of cash-flow projections. They are indispensable for larger and more mature companies. I asked all of our advisors and and some investors on the appropriate way to handle your request for the projections. That is because, as a scientist, I fear they are misleading for a young startup. Here is a quote from a VC at O'Reilly's OATV fund in response to my question about projections for seed-stage startups:

I personally wouldn’t base my decision on projections given the stage you’re at. I’d push back and offer a list of milestones and pathways to achieving those milestones. 

This sentiment was a consensus from our other advisors - people very experienced in starting, growing, and selling companies. People who have raised hundreds of millions of venture capital.

My response to the request for projections is not based on my immaturity. It is based on the advice from our board and from investors.

Without a doubt, I will be used to the projections and cash-flow analysis when we mature our business, because at that point, these projections will be based on data and reasonable extrapolations.

Kind regards,


From: John Spangenberg <>
Date: Mon, Feb 9, 2015 at 1:42 PM

Thank you for your clarification, Lenny. My view as an investment banker (that is perhaps contrarian to other advisors) is that long-run cash flow projections should play a role at every stage in the firm's cycle, for the sake of balanced capital project decision making. There is merit in the discipline to identify the monetization model and the underlying assumptions on capex, opex and sources of income and their impact on free cash flow.

But obviously operational and demand-side non-financial metrics in most cases outweigh financial metrics in valuing business at the seed stage. And...And: I welcome an all-inclusive approach with respect for the nature of each particular stage for balanced decision making.

As to the impact funds, I believe - based on what I've seen so far - that has potential for inclusion as portfolio company in our impact mutual funds. Once we've completed a reporting template for all Stanford and Berkeley incubators, we will definitively reconnect.

Meanwhile, I wish the team all the best in achieving its semi-anual targets.
Pax et bonum - Johnny

JFA Spangenberg MSc PhD
Chairman GeoSteward & GeoTreasuries Inc. 
Climate Risk Secured Bonds EcoVillages
55 Broad Street - New York New York
555 California Street - San Francisco
World Trade Centre - Vancouver
Hong Kong Stock Exchange


[Two weeks later, Johnny spammed me about an animal welfare nonprofit that he was starting, which apparently is part of his fraud.]

Forwarded conversation
Subject: Fwd: Animal welfare portfolio

From: John Spangenberg
Date: Fri, Feb 20, 2015 at 12:10 PM

For your information - have a good weekend

Animal welfare portfolio

Inspired by St Francis who loved the animals as part of our vibrant community of "all living creatures", I am (with Pillsbury Law SF) incorporating a 501(c)3 organization focused on animal cruelty disclosure on an international basis.

You can't control what is unmeasured - following Transparency International fighting financial corruption, I aim to devise a simple animal cruelty index (dept of the suffering times duration) and public (movements in) cross-country, cross-industry, cross-company differences. Transparency will ameliorate ignorance, will enhance consumer choice, trigger legal reform and increase accountability / law enforcement. 

Fact-based information will make investors think twice or encourage them to divest in jurisdictions with excessive animal cruelty. Someday, animal cruelty will be rendered unconstitutional (like human slavery) - hopefully our joint efforts may contribute to bring that day forward - paraphrasing the words of Martin Luther King: that will be a glorious day when our society sweltering with the heat of eco-injustice, sweltering with the heat of animal oppression, will be transformed into an oasis of freedom and ecojustice.

Ghandi once said that how a society treats its most vulnerable species, the animals, is a visible indication of the standard of its moral integrity. By combining the animal cruelty index with the financial corruption index (Transparency International) and the Gini-coefficient for measuring income disparity (World Bank), it is possible to create a robust composite index; a comprehensive benchmark of moral integrity for international comparison and public disclosure.

Hope this information is useful to you.

Pax et bonum - Johnny

From: Lenny Teytelman
Date: Fri, Feb 20, 2015 at 12:17 PM
To: John Spangenberg [and others]

As Alexei said, strong desire to reply with "unsubscribe". 

No, this isn't useful. 
From: John Spangenberg
Date: Fri, Feb 20, 2015 at 12:44 PM
To: Lenny Teytelman 

Thought you're intested in animal welfare, Lenny.

This is a free country. Unsubscribing is fortunately always an option.
Considered it to be done, with respect and pleasure - JFA

From: Lenny Teytelman
Date: Fri, Feb 20, 2015 at 4:22 PM
To: John Spangenberg

Dear Johnny,

Of course, animals have nothing to do with this. I am just extremely disappointed in our interactions. The evening I met you, you conveyed that you are an impact investor, with a fund, and five companies in which you have already invested. It took way too much time to discover that you are only preparing to raise a fund, which may or may not happen.

We all feel at that we have invested a lot of time into our communication. Time that is in critically short supply. To be honest, we feel used.



From: John Spangenberg
Date: Fri, Feb 20, 2015 at 5:50 PM
To: Lenny Teytelman 

Dear Lenny - Why did it take so long for you to become straightforward? 

You seem to be a bright individual and leading a promising company, but I am developing personal doubts due to what I believe to be character flaws. I have gradually learnt to know you as impulsive, unpredictable, inpatient, even inflammatory at some times; risking to destroy critical relationships. Those are frankly not the best qualities for creating long-run shareholder's value in a balanced fashion. I am convinced however that as time goes by, you will grow into more seasoned leadership without compromising intelligence and energy - just my 2 cents.

You complain about wasting time. Investing is a two-way street. It seems the two of us invested precious time in exploring synergies. Advisory delivered by me during our discovery was meanwhile mostly appreciated by you, provided you meant what you were saying in earlier emails. 

Nobody is perfect. I happen to believe the potential of outweighs the downside of our personal chemistry. We are quickly building our $50m "Money and Meaning" Stanford-Berkeley impact funds, leveraging on almost 200 incubator companies in the valley at different stages in their early cycle. 

Nobody is irreplaceable (including myself). I am prepared to delete from our impact platform unlocking the capital base of specific impact investors, as of immediate effect. I hope you will not exercise that option, but the choice is of course entirely yours.

Respectfully yours - Johnny Spangenberg

As a postscriptum, I added two relevant articles. Apologies if the articles are already known to you.

From: Lenny Teytelman
Date: Sat, Feb 21, 2015 at 6:50 AM
To: John Spangenberg 

Dear Johnny,

I apologize for the harshness of my communications. 

I also agree that there is a certain efficiency (maybe ruthlessness)  to the way I do business. I try hard to not waste other people's time and to make sure ours is equally respected. 

So far, this has served us well. We have accepted some and rejected others as investors. No regrets at this point. However, never before have I been disrespectful; whenever saying "no thank you," I have done so politely and without destroying any relationships. And never before have I been as angered by an investor. 

Because I am very transparent and upfront, I crave the same in return. Usually, that is what I get from investors. Yet, in this instance, it seems that you misrepresented your position for a long time, while having complete honesty from us. 

I feel that you did not respect us and our time. Perhaps you meant no disrespect. Perhaps you were not intentionally vague for the longest time about not actually having a fund. 

Whatever the case may be, I also agree that investment is a two-way street. But I am convinced that without chemistry, investment would not be prudent from your side, nor from ours.  

I wish you and your fund luck, but please do remove from consideration for your portfolio. 

All the best,