Times are getting strange.
I have seen a disturbing trend where some capital allocators engage in predatory practices, particularly targeting early-stage orthopedic startups. Some well-known capital allocators ask for up front payments without any serious intent to invest.
Be careful.
Here’s what you need to be aware of:
The Predatory Playbook:
- Initial Pitch Fees: Some investors or firms are now asking for hefty fees just to consider your pitch. For example, we’ve seen demands for up to $17,000 before even discussing your business plan in detail. This is an alarming red flag.
- Comment: Note the extensive list of investments, which might seem impressive but should not distract from the upfront cost of engaging with this firm.
- Due Diligence Fees: Following the pitch, these entities might then ask for significant due diligence fees, sometimes as high as $90,000, which are supposedly to cover the cost of evaluating your startup. However, there’s no guarantee that this due diligence will be completed, leaving startups out of pocket without advancing towards funding.
- Control and Board Seats: After the due diligence phase, predatory investors often seek disproportionate control over the company’s operations, including demanding multiple board seats. This can be detrimental, as it may lead to decisions not in line with the founders’ vision or the company’s best interest.
Protecting Your Startup:
- Research Thoroughly: Before engaging with any investor, conduct extensive research. Check if they have a track record of successful investments in your sector. Look for testimonials or case studies, not just from their website, but from independent sources or industry forums.
- Be Wary of Upfront Fees: Genuine investors typically do not require payment for considering your pitch or for performing due diligence. If an investor does, it’s crucial to understand what you’re getting in return.
- Understand Terms: Ensure you fully understand any agreement you’re entering into. Legal advice is invaluable here. Look out for terms that give the investor undue control over your company.
- Network: Engage with other founders, attend industry events, and use platforms like OrthoStreams to share experiences and warnings. There’s strength in community, and collective vigilance can deter predatory behavior.
- Seek Transparent Funding: Look for investors who are transparent about their investment process, fees, and expected involvement in your business. Clear communication from the outset is key.
Conclusion:
While securing funding is crucial for scaling your orthopedic startup, it’s equally important to do so safely. Be alert to signs of predatory behavior. Remember, your startup’s future is at stake, and not all capital comes without cost. Stay informed, stay cautious, and let’s continue to innovate in orthopedics with integrity.
The startups that I spoken with did research the companies, spoke with current and former clients, and even had ortho insiders who worked with the broker/dealers in other divisions of the company… and still were taken advantage of.
Stay safe and keep innovating,
If you encounter such practices or have insights to share, please do so in the comments below or reach out to us directly. Together, we can foster a healthier investment environment for orthopedic startups.