The Vultures of Startups: A Personal Journey Through the Predators Threatening Innovation

Since November 2022, my journey across India, Singapore, Europe, and the USA has been a rollercoaster of innovation and entrepreneurship. As the founder of a medtech/AI startup, I've encountered numerous entities that claim to support startups but often do more harm than good. From advisors and investors to business deal makers and overseas expansion companies, many of these so-called supporters exploit the vulnerabilities of nascent companies for their own gain. Even government ecosystems, which should ideally foster innovation, can sometimes stifle the entrepreneurial spirit through unfriendly policies and exploitative funding schemes.

1. Predatory Investors:

Investors are essential for startups, providing the capital needed to grow. However, I've encountered some predatory investors who offer funding with highly unfavorable terms, heavily diluting the founders' equity and control. Their goal is to gain a disproportionate share of the company for minimal investment, leaving founders with diminished stakes and influence. In this group of investors there are deal offers to target more than 60% of equity of the seed stage company which leads to founders loosing the control of the company and any future financial benefits. In one such case I have seen, 60% of the equity was targeted for just 300K USD investment. In another case founders were with 38% of share of the company after one round of investment of 600k Euro. In early stage founders do not get market-rate salary otherwise the company will have almost no money to do any growth related activities. Investors in silicon valley are more supportive investors as most investors in silicon valley are ex-startup founders and they understand the pain and struggle of founders. In Asia most investors are finance related ex-employees and they lack the empathy for founders and also their approach are exploitative.

2. Exploitative Advisors

Advisors are supposed to guide startups through complex business landscapes. Exploitative advisors, however, demand substantial equity or fees for minimal value or superficial advice, ultimately draining the startup's resources without offering real benefits. I've seen many startups fall into this trap, losing crucial resources to advisors who provide little in return. I have seen a few mercenary advisors who trap the less experienced startup founders in variety of deals which benefits these malicious motive advisors.

3. Accelerator and Incubator Scams

Many accelerators and incubators promise growth opportunities but provide no financial assistance while seeking significant equity stakes. This burdens startups with loss of equity without the necessary resources to grow. Some good accelerators are there in this area such as y-combinators, accelerating asia, antler, etc. while other accelerators seek equity stakes without offering anything other than training the founders to make a pitch deck. Roughly 30hrs of bootcamp session is not worth to give away 3-7% equity. Startups should ask them to give official valuation of their startup (using combination of methods like The Berkus Method, Comparable transactions method, Scorecard valuation method, Cost-to-duplicate approach, Risk factor summation method, Discounted cash flow method, Venture capital method, and Book value method) before and after the incubation period to really show that these incubators are really doing value addition.

4. University Incubators and IP Theft

University incubators often take away the intellectual property of startups in exchange for incubation support. This leaves startups without control over their own innovations and future profits. Only Swedish universities do not own IP of their students and employees and they do not provide support as well. And if they provide support they typically seeks 33% equity which is again deadly for any startup. In Europe as far as I know, any IP created by bachelor and master students is owned by the student and universities do not have any right on their IP. On the other hand in Asia universities seek claim on the IP of its students as well, or they find a way to take control of their IP by providing incubation support. I wish governments who are interested to promote entrepreneurship may setup a committee to evaluate how growth type of policy they can create to promote entrepreneurship.

5. Unfair Business Partners

Collaborations and partnerships can accelerate growth, but unfair business partners introduce hidden costs, exploit contract loopholes, or fail to deliver on promises. This not only hampers progress but also drains financial and operational resources.

6. Unethical Consultants

Startups often seek consultants for expertise and strategic direction. Unethical consultants charge exorbitant fees for generic or poor-quality advice and deliverables, providing little to no return on investment. I've seen many startups, including my own, suffer from these unscrupulous practices.

7. Dishonest Suppliers

Reliable supply chains are crucial for startups, especially in manufacturing and retail. Dishonest suppliers inflate prices, deliver substandard materials, or fail to meet agreed timelines, disrupting the startup’s operations and damaging its reputation.

8. Fraudulent Employees

Employees are the backbone of any startup. Unfortunately, fraudulent employees embezzle funds, misuse company resources, or steal intellectual property, causing significant financial and operational damage.

9. Patent Ownership by Not-for-profit incubators/accelerators

Not for profit incubators sometimes own the full IP of a startup and lease it back with an exclusive license, adding a clause for a revenue share exceeding 10% of the overall company revenue. This type of arrangement benefits no one: it doesn't increase the company's valuation and makes the startup unattractive to future investors. I am still trying to figure out what benefits they expect from IP ownership. Are they expecting to make returns by licensing the IP in the future, even if the startup that created this IP fails to utilize it? This approach is too risk-averse, akin to "wanting to have your cake and eat it too."

10. Deceptive Customers

Every startup values its customers. Deceptive customers place large orders and then disappear, causing financial strain and inventory issues, and leaving startups with unpaid invoices and excess stock.

10. Hostile Acquirers

Acquisitions can be a pathway to growth. Hostile acquirers, however, purchase startups primarily to eliminate competition, often shutting down the acquired company and negating any potential growth or development. Interesting to see extremely shady business M&A and networking people in this

11. Shady Legal Advisors

Legal guidance is critical for navigating regulations and protecting interests. Shady legal advisors may have conflicts of interest or provide poor advice while charging high fees, putting the startup at risk of legal and financial pitfalls. Some startups I have talked to received advise from legal firms which led them to losses. Specially in USA its very important to get suitable legal advisory or else startup may incur heavy losses and it can result into insolvency due to legal action.

12. Manipulative Marketers/PR firms

Effective marketing is vital for growth. Manipulative marketers overpromise and underdeliver on results, wasting the startup's marketing budget and hindering its ability to attract and retain customers.

13. Unreliable Manufacturers

For product-based startups, reliable manufacturing is critical. Unreliable manufacturers cut corners on quality, leading to defective products that damage the startup’s reputation and customer trust. One such case I took the services of one such firm which has 5 star rating for all its 500+ reviews but this firm failed to deliver the very basic 3d print even. Luckily my contract was up to 3d printing services only. Getting a reliable prototyping company is one of the very tricky area which hardware product based startup needs to solve it very early. Prototyper services are usually expensive but high price not always delivers the reliable services. Try to talk to other startup who has built a product and seek advices from them about which prototyper they have taken the services from and after that use your own analysis whether this prototyper matches your requirements?

Given below are other types of "Vultures of startups". I have personally not come across any direct experience on it so far but startup founders should be aware of these type of firms/peoples.

a. Dubious Recruiters

Talent acquisition is key to scaling a startup. Dubious recruiters charge high fees upfront and fail to deliver quality candidates or engage in bait-and-switch tactics, leading to wasted resources and unfilled positions.

b. Underhanded Distributors

Distribution channels are essential for reaching customers. Underhanded distributors demand exclusivity but fail to actively promote the startup's products, limiting market reach and growth potential.

c. Opportunistic Landlords

Startups need stable office spaces to operate. Opportunistic landlords suddenly increase rent or impose onerous lease conditions, exploiting the startup’s need for continuity and draining financial resources.

d. Malicious Hackers

In the digital age, cybersecurity is paramount. Malicious hackers steal data, disrupt operations, or extort money through cyber attacks, posing severe threats to a startup’s stability and reputation.

e. Deceptive Licensing Agents

Licensing deals can provide additional revenue streams. Deceptive licensing agents promise lucrative deals that never materialize, taking upfront fees and providing no value in return.

f. Exploitative Media

Media coverage can make or break a startup’s public image. Exploitative media outlets publish negative or misleading stories to sell more copies, harming the startup's reputation and market position.

g. Coercive Regulators

Regulatory compliance is essential but challenging. Coercive regulators impose excessive scrutiny or fines, sometimes influenced by competitors looking to stifle the startup, adding to operational and financial burdens.

h. Patent Trolls

Intellectual property is a valuable asset. Patent trolls hold patents purely to sue startups for infringement and extract settlements without contributing to innovation, burdening startups with costly legal battles.

i. Aggressive Competitors

Competitors are a natural part of the business ecosystem. Yet, aggressive competitors replicate a startup's innovation quickly and leverage their market power to outcompete the original. This often leaves startups struggling to maintain their market share, as I've witnessed firsthand in the competitive medtech industry.

There are a few incident in last 1.5 yrs but given below are three such cases which was absurd but still startups are getting into these traps.

Case Study: International certification agency and PoC Exploitation

A notable example is the case of XXX (name withheld), which required startups to perform proof-of-concept (PoC) work without any financial investment. This not only drained the startups' resources but also allowed XXX to take ownership of the resulting intellectual property, leaving the startups with little to show for their efforts. This is a very renowned certification which is often considered a mark of trust in many consumer products but unfortunately these certification ask for IP ownership against their services, and a startup needs to put their time and energy on the PoC for which this agency provides some bootcamp classes and some networking. After owning the IP then startup needs to license their own created IP for use in their own startup. Any startup should instantly runaway from this unless they see their startup valuation is rising by 10X after this PoC.

Case Study: MedTech Accelerators Seeking Equity Without Financial Investment

In the MedTech industry, some accelerators have been known to demand equity stakes in exchange for participation in their programs, without offering any financial investment. For instance, a startup developing a cutting-edge medical imaging device joined an accelerator program expecting valuable mentorship and resources. However, the accelerator provided minimal support while claiming a significant equity stake. This drained the startup's ownership without delivering the promised growth benefits, ultimately hindering their progress and leaving them vulnerable to further exploitation. Such accelerators should show value addition from X to 2X/3X because of their program and then claim <3% equity. Such accelerator might be useful for startup and this is the reason some startups are signing for such programs. I advise to every startup to not give away a single share to these accelerator without the accelerator investing real cash in the startup.

Case study: Business school using startups as live teaching material

Some business schools are teaming up with VCs, accelerators, and venture builders, inviting startups to pitch with messages like, "Invited to pitch at course XX." An additional line often states, "You will be pitching in front of an informed audience, potential investors, and VCs." Startups, hungry for investment and connections, often take these opportunities upon seeing the mention of "potential investors and VCs" as a chance worth pursuing. Consequently, they become live teaching material for business school students, who play the role of VCs using the startups as live case studies. These business schools could use YouTube pitches or pitch decks online, or have their students pitch their own business ideas for these activities instead.

I wish top universities conducting such courses would consider whether Institutional Review Board (IRB) approval has been obtained for using live human subjects as teaching materials. Additionally, ethical approval and risk and compliance committee approvals should be in place for this method of teaching. Furthermore, it's important to investigate any potential conflicts of interest between lecturers and VC firms involved. Lastly, just stating 'informed consent' does not clarify what the consent is about, and a detailed statement of how the startups will be used in the course should be clearly and explicitly mentioned.

My Personal Experience with Government Ecosystems

During my journey, I've also encountered government ecosystems that are not startup-friendly. Some government grants and funding schemes enforce vulnerable startups to give away their IP to government institutes. However I checked their FAQs of these government funded accelerators and agencies, I didn't find any such condition on their websites. These policies not only stifle innovation but also demoralize entrepreneurs who feel their hard work is being expropriated without fair compensation. Governments can play a crucial role in fostering innovation by making supportive rules that protect startups from these vultures. By creating a system that discourages exploitative practices, governments can help preserve the entrepreneurial spirit and ensure that startups thrive.

Another interesting case is where a government grant is provided with no mention of equity requirements on the front page. However, startups are later informed that equity will be owned by these government-funded institutes. This information is subtly written in the FAQs, point number 30 and beyond. Ideally, this condition should be prominently displayed as part of the top eligibility criteria.

Conclusion

The above cases are not an exhaustive list, but some of the important ones I came across myself. Navigating the startup ecosystem requires vigilance and strategic thinking. By understanding the tactics of these "vultures," startup founders can better protect their ventures from exploitation. Building strong networks, seeking transparent partnerships, and maintaining rigorous due diligence are key strategies to mitigate the risks posed by these predatory entities. While the path to success is never easy, awareness and preparedness can help startups thrive despite the challenges. Governments, too, must play their part by implementing supportive policies that protect startups and nurture innovation.