Red Flags for Startups during Fundraising

For a successful and streamlined fundraising, experienced entrepreneurs also need to be alert on parameters that investors perceive as red flags.

Too Many Co-founders or Members in a Team

Giving equity is a great way to motivate and enrolling too many individuals (cofounders, key team members, friends and family investors during the seed stage, or advisors), means too much equity in the hands of too many (especially inexperienced) early shareholders. This tends to be problematic from an investor’s point of view. So keep your fundraising goals in mind when hiring and/or bringing on co-founders. Ideally, the startups should’ve no more than 4 co-founders.

Overheads Are Too High

If overheads are already too high, or the profit margins are low, investors don’t really invest in such startups. Sam Walton’s core principle while building Wal-Mart, was to always control costs better than the competition. This is where he found his advantage and sustainability.

Buzzwords

Buzzwords are the biggest turnoffs. Forget talking the jargons when speaking with investors. Deliver substance.

Founders Have Other Jobs

Is this just a hobby or a part-time gig? Are founders really serious, available enough, and dedicated to make the venture work?

Founders Aren’t Prudent With Money

Investors give money to be used it carefully and prudently grow the business. The last thing they expect is entrepreneurs prone to making rash mistakes. Go lean and strongly consider bootstrapping before fundraising.

Poor Credit Ratings

Failure to pay taxes or EMIs or any pending credit card bills can be catastrophic for everyone involved.

Weak Marketing Plans

Scaling and generating revenues requires a realistic and aggressive plan. If this isn’t your expertise, then look for guidance.

Relying Only on Paid Advertising

Startups can’t rely on paid advertising alone. During the times when funds are tight, you’ve to still generate sales regardless of fundraising success. Profit margins would be better off, if the sales channels are working efficiently.

Blind Optimism

You’ve to be an optimist to launch a startup, but unrealistic or blind optimism won’t sell to investors, and neither is it going to make your startup sustainable. Be positive, but acknowledge the real challenges that exist too.

Claims of Having No Competition

Claiming you have no competition is a sign of being overly optimistic. Recognize the competition; you’ll gain credibility from the investors. Differentiate and explain how you’re better than them.

No Technical Founders

If there are no technical founders, it will lead to significant costs incurred for technical development and maintenance. Such hard costs often lead to death for the startups. Consider having 2-3 cofounders who would cover all the main functions and skill sets.

Asking for Too Much or Too Little Capital

Founders may not really know how much to ask. Don’t be shy take help of advisors, if this isn’t your expertise. Don’t forget that you can raise additional capital in further rounds.

Poor Use of Previous Funds

Startups that have burned through previous rounds of funding without generating results are considered to be scary proposition. You’ve got to have something to show against it.

Early Investors Not Participating in Additional Funding Rounds

If previous investors aren’t participating in future rounds, it’s a bad sign. If there is a good reason for that, ensure to address it proactively.

Entrepreneurs Have No Financial Skin in the Game

When launching a startup, entrepreneurs put in a lot of time and energy, but investors feel a lot better if founders are putting some money in, too. It’s about equal risk sharing with the investors and investing your own money really shows your commitment in making this venture succeed.

Lack of Momentum

Even if you haven’t raised any funds before, it’s critical to track and show progress. It can be revenue, users or customers, market share, or any other metrics you are focusing on. Ensure that you’re tracking and reporting traction as well as the momentum.

Moving the Ball Forward

Being alert to these red flags and tackling them in advance is smart move for getting funded fast. Be prepared, streamline the process, clear any potential hurdles, and find the most efficient method of raising capital. Ultimately none of the red flags above are a show stopper. As a founder, address potential concerns and have a good explanation behind it. When you do that, raising capital and completing successful rounds of funding can happen a lot faster.

Need help to discern and address any of such flags? Click here.