Deal Breakers, Part 1: A Red Flag List from Top VCs
Often times VCs write their thoughts on various spaces or what quality traits they look for in companies and Founders. However, not too many VCs have written about what they don’t want to see a.k.a. specific red flags that they have when it comes to Founders and the companies they’re starting.
With VCs meeting dozens of companies every week, pattern recognition and a common set of questions are consistently brought to the table. Although some questions may seem a little odd, they almost certainly have a distinct reason behind asking them. The answers to these questions can end up being the difference between getting a second meeting and/or an investment. Whereas some founders may get a highly detailed pass email outlining the specific issues the VC has with the company, others may receive one that’s a little less substantive. Generally speaking this may be a sign that the VC had concerns around the Founder and perhaps a red flag arose during the meeting.
Since starting in venture almost two years ago, I’ve always found it interesting to learn about the various red flags that other VCs have. While some are pretty consistent across the board (e.g. early stage Founders hiring bankers to help them fundraise), others are a bit more nuanced and quirky (e.g. Founders not clearing their own dishes).
Over the last month I’ve drilled down deeper and created a database of VC red flags. I did it by emailing fellow investors and reading up on public posts from VCs all over, including: Bain Capital Ventures, Lowercase Capital, Greycroft, Stripes Group, BDMI, Boston Seed Capital, Sigma Prime, Charles River Ventures, RRE, Benchmark, First Round, Vayner RSE, Lerer Hippeau and many more. Following this exercise I thought it would be interesting to share a large portion of those red flags and breakdown what I, or the particular investor, perceives to be the reasoning behind it…So here’s what we have.
In Part 1 you’ll find red flags that are more Founder related. In Part 2, which I’ll publish later this month, you’ll learn more about business specific red flags.
*It’s important to note that the below list was crowdsourced from a number of VCs and are not all thoughts of my own. Some investors preferred that I did not share their name/firm so you will notice that most are not cited. However, it was/is quite interesting to learn the reasons behind them. For Founders reading this I hope that this serves as a resource, showing some of the quirky, but also interesting thinking/perspectives that VCs have. Enjoy.
Founder Related and Quirky Red Flags
You send someone else to do your meeting with investors — Not really sure why this would ever happen for an early stage company. The Founder needs to be able to sell a vision in order to be successful and by having someone else represent them in a meeting with investors it causes stirs up all sorts of question marks.
When Founders take more than 48 hours to respond to emails — From what I’ve seen the best Founders in our portfolio respond to emails within 24 hours. Especially when they were out fundraising. Clearly there are some exceptions, but Founders who are detail oriented, hardworking and get shit done (like a fundraise) are usually not letting investor emails go unanswered for 48+ hours.
KPI Knowledge —How do you define your KPIs? Vanity metrics are one thing, but often times they don’t paint the picture of how and why a business is actually performing well or poorly. Being able to define your KPIs “correctly,” or at least presenting why you believe those are the drivers of your business vs. other ones, is an important testament as to whether the investor believes you truly understand your business model or not. This also directly correlates with how much homework/research/experience the Founder did/had before jumping into this venture. Most VCs are looking for Founders that will build data driven cultures internally (having internal KPI dashboards is always a plus) and if their list of KPIs for your business doesn’t closely resemble your list of KPIs for the business then you may be in trouble.
*Most Founders will be asked to send over a breakdown of their KPIs by month or quarter. If the Founder says that they’ll send them over, but then it takes days or weeks to “pull together the data,” VCs may question whether or not you’re tracking them and/or actually using them to help form the strategy for your business.
Roles and responsibilities aren’t clearly defined…especially within a team of friends or siblings — When best friends or siblings start companies together it’s integral that the roles and responsibilities are clearly defined AND that the other people are 10X better at their specific role than one another. Too many times Founders have given friends or siblings C-level role titles when they start the company, but one friend or sibling ends up growing/developing at a much faster rate of speed, which ultimately creates a difficult decision and conversation for the executive team members and/or investors.
Unfamiliar with industry specific acronyms for their vertical — Quite a few VCs have been entrepreneurs themselves or have invested in the past in companies within a various verticals. As a result they’re familiar with some of the nuances and “lingo.” Understanding the intricacies to your industry is critical to success and doing your homework on it should occur long before raising venture. Thus, when hardware Founders don’t know what a DVT is, apparel founders don’t know what a CBS looks like it or app Founders don’t know what k-factor means, it can make the startup an automatic pass.
Founder not grounded in reality — $10M in revenue by the end of Year 1 with a net income of $4M is ambitious, but is it realistic? VCs can and will be wrong, but they’ve seen a lot of scenarios play out before. If they don’t think a Founder is grounded in reality it’s usually a quick pass. With that said as moonshots start to become more frequently funded, I’m interested in seeing what that types of personalities are behind them.
Overselling your prior experience — VCs don’t have a problem with first time founders or people who are a bit inexperienced. However, they do have a problem with people overselling what they did in their past. Being up front about your role and responsibilities at startup X or company Y is important as much of it will come out in diligence and you don’t want to oversell it.
Suggesting a fancy/expensive restaurant for lunch meetings AND/OR leaving before the bill is paid — Almost anytime you meet with a VC over coffee or lunch they’ll pay for it. Especially at large funds. However, that doesn’t mean that you should take advantage of the situation to an extreme or just be a rude.
When they treat analysts or associates like 2nd class citizens — Maybe one of the most resurfaced topics of 2016? I won’t dive into details, but associates are people too. And they can play a major role in you getting funded or not. Read Michelle Tandler’s post here for more info.
When they have Executive Assistants — If you’re post-Series A this is different, but many seed investors don’t want to see Founders paying an EA to help them. They want to see Founders who are grinding things out and getting things done in the early days — showing off perseverance, resourcefulness, and grit.
Saying “we’re looking to close next week” — The old FOMO trick can work in your favor or against it. First Round wrote one of the best blog posts I’ve ever seen about how to manage a fundraising process. Managing it poorly may end up having an investor walk away from the table or just make it that much harder for a deal to get done.
When Founders don’t jump at the opportunity to show off the office, team and culture — What are you hiding? Building a strong team and culture plays a huge role in the success of your business. Even if it’s not perfect, you should invite the VC by so they can meet the other people they may be working with and figure out how they may be able out with other things as well.
Saying you’re not raising when you’re raising — We’re just all sorts of confused…But you’re starting to raise in a couple weeks? So should I not offer you money? Why can’t we just be straightforward with one another?
Evasiveness — when the founder tells a long story, with caveats, to get to a number in response to a simple questions like “What was 2016 revenue?” I’ve been guilty of this too, but when asked yes or no questions just give yes or no responses. If you don’t know the answers to questions tell them you’ll figure it out. Different people have different views on the whole “what if I don’t know the answer?” question, but ultimately I think just be concise, direct and truthful with the investor and they’ll respect you more because of it.
Not sharing materials digitally that were previously shared during a meeting — this just becomes a pain during the diligence process and a Founders goal should be to make things as easy as possible for them to get an investment. Some Founders actually have good reasons as to why they don’t share certain materials, but for the most part not sharing them leads to a bad start in the relationship.
Being overly dilution sensitive or optimizing on price — Would you rather own a small slice of a large pie or a large slice of a small pie? Do you want value-add investors or dumb money? These questions are ones that each Founder needs to consider individually, but quite a few VCs sent over red flags pertaining to this topic. Eric Paley from Founder Collective has been writing a lot about efficient venture capital funding for startups and his post Venture Capital is a hell of a drug is worth a read.
When a Founder says another VC is “soft committed” but you find out they are not — Venture is a weirdly small community. Something I quickly realized in my first 6 months. Chances are that investors at the early stage will talk to each other and nothing will kill a conversation as fast as an entrepreneur lying to you. Reading the interest level of another VC happens all the time, but telling a VC that another VC is committed when they’re not is a big no-no.
Talking about downside protection — Let’s talk about the great things to come. Napoleon Hill once said “what the mind can conceive, it can achieve.” Founders have a long road ahead of them and we don’t necessarily want them thinking about downside protection in the early stages. Think positively.
Won’t share financials after the first meeting — Do you not have them readily available? Because that’s the initial thought that many VCs come to when you refuse to share them after a first meeting.
Talking about potential exit opportunities within the first 12–18 months — Quick exits are a tough game to play in and an even harder game to predict. Lets build a massive, sustainable business. If you happen to exit early great. That’s what most VCs want to see/hear.
Prior investors not re-upping without good reason — Possibly the first red flag you learn about in venture. If these people invested in you and believed in you before, why aren’t they investing again? Sometimes the answer is a lack of resources (e.g. angel investors), but other times investors will find out a more specific reason that ultimately turns them off.
If in the pitch the Founder is trying to convince him or herself of things — Confidence, self-awareness, focus and an incredibly strong understanding of your business strategy are important factors in every pitch. VCs may not believe in a certain direction for your business, but they may try to push you down that path with leading questions to see if they can get you to convince yourself of it. This may lead to the raising of a red flag.
Citing partners, advisors, customers or potential customers in your deck who aren’t real relationships — One investor told me a story about a couple of his portfolio companies being listed in a company deck as customers. Long story short is that he liked the product, but after calling his companies to find out their thoughts he found out they they weren’t customers. That led to a quick pass…Honesty is key.
An entrepreneur that thinks they know everything already — One of my personal favorite traits of an entrepreneur is admitting what they don’t know, both personally and about their business, but also the ability to admit their weaknesses. Stubbornness can be good in some situations, but no one likes a know it all.
When a founder is so enamored with the product that they exclude speaking about other major business elements — Too often “product Founders” are able to build great products, but they never take off. They believe that the product alone can create success for the company, but in reality so many other factors need to a support it as well. Excluding these other “major elements” from your pitch will typically make a VC thing that you may be one of those “product only” founders.
Spinning information instead of giving us the facts — this happens a lot with data and deals. VCs aren’t fans of getting excited about the data presented on a chart because of the way it was presented, but when looking at the raw data realizing that things are a lot chunkier. The lack of transparency thing again will come back to get you.
Bad breath — an absolute no go. Partially because this specific investor brushes his teeth 3–4X a day, but also because it shows a lack of attention to detail which every founder needs to have and secondly a lack of empathy for others.
When a Founder is raising seed funding but hasn’t raised from any local angels/people from their startup ecosystem — Have you hustled and made a name for yourself in your local ecosystem? Have you been resourceful and learned from some of the best entrepreneurs and investors there? Do people in your ecosystem have good things to say about you? If so, why haven’t you taken some money from them? They all know you better than an investor who has just met you a few times. Thus, VCs see a lot of value in people like that investing in you.
When Founders are dating — A dangerous game on multiple fronts that you can imagine. The two main ones are 1.) What if they break-up? 2.) Re-read the friends and siblings red flag.
We are basically company X meets company Y with some elements of company Z — I wish I was taking this out of a Silicon Valley episode, but far too often VCs hear that we’re the Uber for X or other comments along those lines. While that may be a good description for some, it’s usually a red flag because it show an inability to articulate the vision and a lack of understanding of the other companies business model of value proposition.
Company has been raising for more than 4 months — Unfortunately fundraising risk is a real thing. Whether it’s the founders inability to fundraise or other VCs just not liking the space, many venture firms are signal investing to an extent these days so raising for 4 months isn’t a good sign to them.
Name dropping/saying “X, Y and Z think our business is cool” — VCs do not look at this as proxy of the quality of team, product or business.
Vacationing during a fundraise — the best Founders I know didn’t take a vacation during the first couple years of their startup, let alone during a fundraise. If getting a fundraise done is such a priority and goal of yours then shouldn’t taking a vacation be a sacrifice worth making at the moment?
Being rude to office managers or receptionists — If you’re going to treat them poorly, how are you going to treat your employees?
Having no mentors — Almost guaranteed, the most successful people in the world have all had mentors. Most of these mentors are people that they speak to regularly and usually it’s for specific reasons. When shit hits the fan in your startup, which it will, VCs want to know that you have a list of people who you will call. If they’re good VCs they’ll want to be added to that list as well.
Manufacturing a product in China, but not knowing when the Chinese New Year is — Chinese factories shut down and they also prioritize large companies over startup right before this. The little details are important to learn and keep track of. This is one of them.
Too High of a Salary for the Founder(s) — A successful seed investor out West said the only correlation he could find in the success of his portfolio over the last 5–10 years was the salary of the Founder pre and post-seed round. The best Founders wanted to put as much money back in the business as possible. While investors don’t want you worrying about how you’re going to eat or live, they also don’t want to see you making ridiculous money either.
Flirty Founders — This just isn’t tolerated.
Collegiate or Young Founders focused on PR — Go out and build a business. Built a great product, get traction and then get famous. Too often young founders in college are taking advantage of their age to get a ton of PR early and aren’t concerned with the fundamentals. They speak at events, write for blogs, etc., and aren’t focused on what’s actually important…building the business!
Haven’t Done Any Homework on the VC They’re Meeting With — Call it a selfish one, but not knowing the firms portfolio, strategy or which partner is right for you to approach can be a red flag. Founders wouldn’t (hopefully) walk into a sales meeting without being prepared and knowing about the company they’re selling to, so why should investors be any different.
Inability to Articulate Assumptions in Financial Model — VCs want to see that you were thoughtful about the financial model you built because it directly impacts the strategy that you’ll be implementing and the hires you’ll be making.
A bit of a long post, but hope you enjoyed it. It’s important to note that investors don’t all have the same red flags and some will completely disagree with many on this list. However, I felt like it’s important to understand the investors reasoning behind them, whether his or hers thinking is actually flawed. Now, when you as a Founder go to pitch a VC, hopefully you’ll be able to avoid some of these red flags.
I’ll continue to update this post as other investors send their red flags in or share them with me. If you don’t see one on here that you have, feel free to email me at JShuman@Corigin.com or tweet me @BoatShuman.
-Jason Shuman, Corigin Ventures