A list of red flags that investors and venture capitalists avoid in startups

Good investors and venture capitalists tend to have a set criteria basis which they take a call on funding the startup. But beyond these ‘must-haves’, they also have a set of ‘red flags’ that can flip their decision if they find them in your business plans or pitch.

In this article, I research and share some important ‘do not do this’ traits that founders should follow for making a great impression. You can use this as a checklist before entering the pitching room.

Investor red flags during the first interaction

Making a good first impression is important for any investor meeting.

As you follow the best practices, ensure your first interaction doesn’t include any of the below:

Late email replies

When you’re fundraising, as a founder, it’s important to be prompt with your emails and know how to write a good email copy by following good email etiquette. Late replies show a lack of seriousness and commitment.

Not sharing relevant materials

It’s a good practice to develop relevant reading materials for investors. Sharing too much information before soft commitment can be dicey, but having presentable decks and brochures is expected. Refusing to share can cause friction as you try to develop investor relations.

Investor red flags during the pitch

The investors have decided to give you a chance to showcase your business and evaluate the same.

Lack of clarity and confidence in the pitch

If your pitch itself isn’t self-explanatory, your listener will be confused and get quickly disinterested in what you speak further. Or, if you do not present it confidently, the listener imbibes the energy and doesn’t feel confident in your words.

The best way to overcome this is to practice your pitch with friends. Take advantage of occasions to present your startup via community events and ask for feedback.

Not knowing your numbers

Since you’re the leader of your business — it’s expected that you know your business performance by heart! Ensure all relevant metrics, KPIs, and long-term goals across growth and financials are known to you. This also showcases that you know your business industry well and are methodical in your approach.

Also, do not lie about your metrics!

Deliberately inducing FOMO

It’s debatable that the Venture Capital industry runs on FOMO and trends, but trying to cause one is a put-off. Making false statements like ‘Another XYZ VC is soft committed’ is risky. The investor community is quite small and indeed cross-check.

Investor red flags for founding team

The ‘team’ slide in your pitch deck holds extreme importance and is scrutinized by investors. They search for the following main red flags in the founding team:

Founders do not know each other well

While a lot of cofounder-matching platforms are cropping up, it’s important to ensure the founders know each other well enough before starting up. Investors do search how compatible the founding team is and prior experience of working together is a great plus.

No full-time team

Giving money to part-timers and contract work-heavy teams is an obvious red flag. Not speaking fully about your venture can make investors question your commitment and if their money is in serious hands.

Too much dilution in founder equity

If you gave up too much equity during the early stage itself for seed rounds, the chances of raising further rounds become difficult. One expects founders to own 40%–50% during Series-A, though the percentage might vary across investors.

Investor red flags on the business model

While you got them interested with your pitch, now investors will look deeper into your business model. Ensure you have taken care of the below pointers:

Inadequate TAM — too big or small

TAM stands for Total Available Market — it represents the total potential money your business can make in the market it is serving. A too-small TAM will not fit the 10X expectations investors have, while a too broad TAM will indicate a lack of focus.

Low traction for an extended period

Traction is the biggest proof that your startup idea is practically feasible. If you are not having good traction for a very long period, that might indicate a lack of meaningful efforts, inability to run the business or a poor product that lacks monetary value. Major traction coming from one channel is also a red flag.

Failed businesses in a similar industry

If you are building on a startup idea that has shown a history of failure, then investors do get cold feet in going ahead with your business. They will perform their due diligence on those failed models and look for any patterns in yours. Hence, conduct a thorough competition analysis, especially of failed concepts to ensure you aren’t repeating their mistakes.

About Author:

Harshala is a writer and maker in the publishing, community, and marketplace industry. She is building merrative.com — a dribble for the publishing industry. Connect with her to hire writers and get engagement for your content creation efforts.

You can hire her for writing long-form blogs and guides in the niche of product management, content marketing, no-code, and community building. DM on Twitter or LinkedIn to connect.