7 Red Flags For Investors Not To Invest In Your Startup
Every startup investor you know (including myself) will tell you that raising venture capital is no easy task. This is because many variables need to come into play and align for a round of funding to happen. In principle, you’ll need to have a well-organized business model, find the best funding options and understand the uniqueness of your business idea, among others, to get started.
As a business owner, your entrepreneurial journey will encounter a lot of setbacks that will either make you or break you if you get it all wrong from the start.
Let’s delve into some of the red flags for startup investors.
1. Incorrect Founding Team
I can’t help to think that when you decide to start a business, you should at least have a certain amount of money ready. I succumb to the notion that the founders should have the capacity to generate the first $100k of revenue without needing any external talent.
Getting a co-founder on board is not just a simple task. It might take a bit of smart searching to get a co-founder with whom you can align. Take a case of a biotech company started with two founders with a business background raising money to hire a scientist to join them or a tech company trying to raise money to recruit a CTO.
Now, this doesn’t make sense, does it?
Many founders often find themselves doing this and try to get away with it.
Having at least one co-founder possessing some technical abilities or marketing and distribution skills is crucial.
They may save you money and time in hiring someone. Again, if you hire a development agency or marketing agency, you’ll be bound to pay market salaries to their employees, with a profit margin on top.
Nobody wants to pay marketing costs for developing or marketing a startup; that’s why having these skills on the team is absolutely necessary!
2. Baggage
Have you ever had a partner who came along with their baggage in a relationship?
I generally believe most of you have (me included) responded positively or negatively towards such a situation. If you’ve been there, you know how it bothered your mind, especially when it involved financial debts.
The same is true for startup businesses. Nobody likes debt on your balance sheet, especially if you need the capital to pay it off.
That could become a deal-breaker!
Another common issue is when a significant percentage of equity is owned by someone who is not active with the business; subsequently, there could be another problem if there is no vesting agreement between the founders.
3. Raising Money To Survive
No investor can turn a blind eye to a startup raising money just to survive. There is no doubt that they won’t put their money on a sinking ship. The naked truth is that we raise capital to scale and grow faster, not to “save the company.”
Honestly, if your company is struggling, stay clear of raising capital as your first solution. At this point, as a CEO, you’ll have to bet on your ability to raise capital versus your ability to salvage the business.
4. Outrageous Founder Salaries
Every founder wants to earn good money right from the start. But to be honest, that’s not how it works when you’re using somebody else’s money to grow your company. At these early stages, it’s advisable to take home salaries way below the market levels. Eventually, it will pay off when the startup is on its feet and running with financial stability.
5. Not Understanding Your KPIs
Like most newlyweds, sharing your vows straight from your heart is the pinnacle of sincerity and love for one another. Some may recite their vows by heart with ease, indicating how much they value and love their partners.
The same case applies to your KPIs. You need to have them on your fingertips and know by heart. They should be numbers that you live and breathe every single day. Besides, if you’re handling them correctly, there is no way you haven’t memorized them.
Developing your company’s KPIs may not be an easy task. But it’s significant to have them as it gives you real data points to management when making decisions.
6. Distractions
Some entrepreneurs may decide to juggle between two or three products simultaneously to see which one works. But honestly, this doesn’t seem right, especially when you’re in your early stages as a startup. Call it looking on the bright side; most investors (if not all) expect your complete dedication to your business. No running other gigs or side-hustles, but growing this company. They’re betting on their hard-earned money on this product or service, and that’s it!
As for having the capacity to build multiple products: Yes, it sounds ambitious. But there is no way to do it unless you have tremendous resources and a large team. Again, you may have excellent ideas about transforming your product or service, but know when to talk about them. You can draw the roadmap of the near future concerning significant releases, features, and user milestones.
From your pitch deck, let investors understand what you’re currently focusing on and your ideas for the future. It has to be clear to them where this money you’re raising is going and how it will get the company to the next stage.
7. Not Having Enough Money
Raising money on your own sounds great in reality, but remember, the money must get your company to a tangible milestone. Now, if you decide to raise $200,000 to build your product, but you need to raise an extra $400,000 to launch it, you’re in a bad position. In a sense, it’s absolutely a red flag!
As important as it sounds, you need to raise enough money for your next milestone. It means that that will be a new round of funding, which might turn out to be profitable.
Therefore, as you get into the next round of funding, you must do more research on the KPIs required for that round relating to your startup. Again, understand where you fall in terms of either Series A or seed investors so that you don’t end up in a weird limbo where you’re too big for seed investors or too small for Series A investors.
Conclusion
As co-founders, achieving success with your business can happen depending on how you plan right from the start. Therefore, you must be very keen to identify those red flags that may halt your success. Nothing comes easy, especially if you’re a startup.
This applies to when you’ll be raising capital, looking for the right co-founders, and understanding your financial model. Be wise and smart enough to avoid walking your business gingerly into financial limbo.
