Beware of the Startup Industrial Complex

Three rules to avoid getting scammed by advisors.

As an early stage VC, one of the saddest things I observe from meetings with founders is the toxic and pervasive influence of what I call the start-up industrial complex (the SIC).

The SIC is a universe of charlatans and blissfully unaware “advisors” who masquerade as help for early stage companies and, in fact, set them back or bleed them dry for the personal gain of the advisor. There is an almost infinite number of people desperate to take money out of the entrepreneur’s pockets, so I thought I’d write a post about how you can identify and protect yourself from the posers and in the process learn how to identify real help that is there for you.

SIC members usually ask for cash upfront to perform tasks for start-up companies. It may be they offer a so-called, proven method to develop fundraising decks (laughable, when you can get the best advice free from YC), or perhaps an introduction to a prospective investor or customer. Regardless, the first warning sign that you’re among the SIC is when they ask for cash upfront to “help” you.

Rule Number One: the best help for start-ups comes from proven leaders who don’t need cash from your seed capital and genuinely want to help ideas they believe in. 

Another red flag is when a SIC member asks for equity in your company upfront, without any performance vesting standards. For example, “give me 5% equity in your company and I’ll give you advice and allow you to use my face on your slide deck to raise money.” This is a bad deal for you, if you take it.

Rule Number Two: when giving equity, it should always vest over time for performance tied to measurable goals such as sales or results that move your KPIs.

Most SIC members are either burned-out, serial founders who never got an exit, or someone who had a senior management position in a large, mature company. Both types of these people have experience, but they don’t have the experience you need. Failure can be a good teacher, but founders who have not gone through the full process of start-up to exit may just repeat the same failure lessons, and share their mistakes with you. Similarly, big companies may be good at what they do, but the people who work in them are not familiar with the effort and methods to create and grow something from scratch on a small team with a limited budget. Many of these people have good intentions, but they just don’t speak start-up, and are more dangerous when they think they do.

Rule Number Three: Seek advice from people who are either successful founders or VCs, better yet, someone who has done both.

Founders, we love you and want to see you succeed. So beware of those who come looking for cash, free equity, or have nothing to contribute to your future success. The SIC is real, spread the word and beware!

Author: Joe Merrill

I'm a VC in Austin, TX.

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