10 Red Flags for Investors which Founders should be aware of

In order to ensure a successful and streamlined fundraising, experienced entrepreneurs also need to be alert to what investors may perceive as red flags.

1. Too Many Founding Team Members

Too much equity in the hands of too many (especially inexperienced) early shareholders can be problematic. Even too many team members at the beginning can be problematic from an investor’s point of view. So keep your fundraising goals in mind when hiring and considering bringing on cofounders.

2. Overhead Is Too High

If overhead is already too high, or the profit margins are going to be too small, investors should rightly be concerned. One of Sam Walton’s core principles when building the Walmart empire was to always control costs better than the competition. That is where he found his advantages, and sustainability. Not everyone wants to run a discount business, but there is no lack of scale or revenue at Walmart.

3. Founders Have Other Jobs

Is this just a hobby for the founder? A part-time gig? Or are founders really serious and dedicated to making this work? Are founders available enough, and at the right times, to make the venture work?

4. Weak Marketing Plans

Scaling and generating real revenues is going to require a realistic and aggressive plan. If this isn’t your area of expertise, look for guidance. 

5. Relying Only on Paid Advertising

Startups can’t rely only on paid advertising. Especially if they have only identified one or two channels to use. There may be times when funds are tight, and you need to be able to generate sales regardless of fundraising success, and profits and profit margins will be a lot better if there are other sales channels working.

6. Blind Optimism

You have to be an optimist to launch a startup, but unrealistic, blind optimism isn’t going to sell investors, and it isn’t going to make for a sustainable startup. Be positive, but acknowledge the real challenges that exist too.

7. Claims of Having No Competition

Claiming you have no competition is a sign of being overly optimistic. There will be the potential for some form of competition. Recognize it, and admit it, and you’ll gain credibility and investors will be confident that you are on top of it. 

8. No Technical Founders

If you aren’t technical, and you have no technical founders, that means there will likely be significant cost in paying for technical development and maintenance. That is a hard cost that the venture may not survive without. Contrast that setup with having at least two or three cofounders who cover all of the main functions and skill sets.

9. Asking for Too Much or Too Little Capital

This can beared flag that founders may not really know that they are up against. Don’t be too shy. Don’t forget that you can raise additional capital in further rounds. 

10. Early Investors Not Participating in Additional Funding Rounds

If previous investors are not getting on a round, that can definitely be a bad sign. If there is a good reason for that, make sure to address it proactively, rather than allowing it to work against you. 

Ultimately none of the red flags above are a show stopper. As a founder, what you need to do is put a correction wherever it needs to be placed to address potential concerns and have a good explanation behind it.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Blog at WordPress.com.

Up ↑

%d bloggers like this: