As an early stage startup investors, you have a lot of options when it comes to where to invest. There are some things that always indicate trouble with an investment, but there are others that don’t.
Investments in startups are risky, and the vast majority of them are unsuccessful or do not make a profit for their investors. Due diligence is performed by us behind the scenes in accordance with the size and stage of the company when investing in a typical venture capital company. Ultimately, it is up to the investor to determine if the claims in a company’s investment thesis and pitch deck are accurate. To maximize their chances of obtaining early-stage capital, startups present themselves in the best light possible. For a company’s selling points to be accurate, it is essential to validate optimistic figures and statements.
- 1 Below are the top 8 major red flags for early stage startup investors
Below are the top 8 major red flags for early stage startup investors
1. More minds, more hands
Cofounders to advisers to seed investors make up a startup team, but investors should watch out for teams that have too many members. The distribution of equity to a large number of members, especially if they are relatively inexperienced, can cause future problems and money mismanagement down the road.
2. Subcontracting technical skills
The majority of startups have an element of technical development, such as website design, product design, or app development. A company that lacks the technical skills needed to implement the business and instead farms out to third parties places much of its value in the hands of someone not fully invested, which can greatly increase the cost of having to pay an outsider to develop and adapt the business. A company with at least one person with relevant technical skills on its founding team will be most investable.
3. Entrepreneurship isn’t all about founders
The maximum success startups have passionate founders who commit all in their time to the boom in their agency. A founder who isn’t inclined to surrender a full-time activity to commit themselves absolutely to the startup suggests buyers they aren’t absolutely assured of their new commercial enterprise and want an activity to fall back on. Entrepreneurs who’ve the time and availability to paint their agency generally tend to have more fulfillment and are more attractive to buyers.
4. Poor margins
The key to a hit startup is controlling costs and preserving overhead charges low. If a startup is working on lean margins and doesn’t have an actual plan on a way to carry the one’s margins down, an investor is probably pouring cash into something and won’t get a whole lot of a return, if any, because the cash will all visit production fees. A startup with low margins must have a viable plan of a way to enhance margins with the aid of connecting with new partners and producers or growing manufacturing levels.
5. Lack of industry knowledge
Investors are normally seeking out wonderful buyers who apprehend and deal with the demanding situations their enterprise will face. Entrepreneurs who deny having opposition or who’re blindly positive display that they aren’t absolutely privy to the enterprise they may be entering, which may be a caution signal of lacking out on different principal issues. Just due to the fact an enterprise has opposition doesn’t suggest it’s going to fail; buyers in reality need marketers to deal with the opposition and feature a practical plan of the way they’ll perform in an aggressive enterprise.
6. Inadequate personal finances
When an investor sees a startup, the entirety is at the table. Founders with terrible credit score records or no different supply of earnings may be a danger due to the fact the investor can’t be absolutely assured in how they may deal with the cash and if that cash could be going to fund the founder’s way of life rather than the company. Responsible marketers have to have monetary reserves or every other supply of earnings they are able to use for residing expenses.
7. Placeless Growth
Smart traders study a startup’s records and the way lengthy it has taken the group to attain its cutting-edge state. This additionally consists of searching at preceding presents or investments to look what the agency did with that money. Slow or stalled increase indicates traders that the group confronted troubles associated with strategy, inventory, or finances. If increase has stalled, marketers need to have a legitimate rationalization that indicates the plateau became the most effective brief and that they could get back on course again.
8. Deficiencies in growth plans
Entrepreneurs want to be ambitious and realistic. Investors usually don’t need to spend money on an agency that doesn’t have an entire and robust plan for advertising and growth as it indicates the founders haven’t notion via the complete method and dreams for the agency. An entire marketing strategy consists of a method for advertising, growth, and growth.
It is important to realize that investment decisions are not black and white, but rather highly personal. In general, there are no clear-cut “right” and “wrong” strategies; however, the most common mistake most early-stage investors make is not diversifying sufficiently, especially since doing so can minimize the impact of volatility. Before investing, early stage startup investors are strongly encouraged to carry out their own due diligence.
Related Article: Questions to Ask Before Investing in Startups