Since starting in venture, I’ve always found it interesting to learn about the various red flags that other Investors have. While some are pretty consistent across the board (e.g. early stage Founders hiring bankers to help them fundraise), others are a bit more nuanced (e.g. Founders not clearing their own dishes).
Below you can find a summary of the most common red flags about Founders:
You send someone else to do your meeting with investors — Not really sure why this would ever happen for an early stage company. The Founder needs to be able to sell a vision in order to be successful and by having someone else represent them in a meeting with investors it causes stirs up all sorts of question marks.
When Founders take more than 48 hours to respond to emails — From what I’ve seen the best Founders in our portfolio respond to emails within 24 hours. Especially when they were out fundraising. Clearly there are some exceptions, but Founders who are detail oriented, hardworking and get shit done (like a fundraise) are usually not letting investor emails go unanswered for 48+ hours.
KPI Knowledge —How do you define your KPIs? Vanity metrics are one thing, but often times they don’t paint the picture of how and why a business is actually performing well or poorly. Being able to define your KPIs “correctly,” or at least presenting why you believe those are the drivers of your business vs. other ones, is an important testament as to whether the investor believes you truly understand your business model or not. This also directly correlates with how much homework/research/experience the Founder did/had before jumping into this venture. Most VCs are looking for Founders that will build data driven cultures internally (having internal KPI dashboards is always a plus) and if their list of KPIs for your business doesn’t closely resemble your list of KPIs for the business then you may be in trouble.
When best friends or siblings start companies together it’s integral that the roles and responsibilities are clearly defined AND that the other people are 10X better at their specific role than one another. Too many times Founders have given friends or siblings C-level role titles when they start the company, but one friend or sibling ends up growing/developing at a much faster rate of speed, which ultimately creates a difficult decision and conversation for the executive team members and/or investors.
Unfamiliar with industry specific acronyms for their vertical — Quite a few VCs have been entrepreneurs themselves or have invested in the past in companies within a various verticals. As a result they’re familiar with some of the nuances and “lingo.” Understanding the intricacies to your industry is critical to success and doing your homework on it should occur long before raising venture. Thus, when hardware Founders don’t know what a DVT is, apparel founders don’t know what a CBS looks like it or app Founders don’t know what k-factor means, it can make the startup an automatic pass.
Founder not grounded in reality — $10M in revenue by the end of Year 1 with a net income of $4M is ambitious, but is it realistic? VCs can and will be wrong, but they’ve seen a lot of scenarios play out before. If they don’t think a Founder is grounded in reality it’s usually a quick pass. With that said as moonshots start to become more frequently funded, I’m interested in seeing what that types of personalities are behind them.
Overselling your prior experience — VCs don’t have a problem with first time founders or people who are a bit inexperienced. However, they do have a problem with people overselling what they did in their past. Being up front about your role and responsibilities at startup X or company Y is important as much of it will come out in diligence and you don’t want to oversell it.
Suggesting a fancy/expensive restaurant for lunch meetings AND/OR leaving before the bill is paid — Almost anytime you meet with a VC over coffee or lunch they’ll pay for it. Especially at large funds. However, that doesn’t mean that you should take advantage of the situation to an extreme or just be a rude.
When they treat analysts or associates like 2nd class citizens
When Founders have Executive Assistants — If you’re post-Series A this is different, but many seed investors don’t want to see Founders paying an EA to help them. They want to see Founders who are grinding things out and getting things done in the early days — showing off perseverance, resourcefulness, and grit.
Saying “we’re looking to close next week” — The old FOMO trick can work in your favor or against it. Managing the fundraising poorly may end up having an investor walk away from the table or just make it that much harder for a deal to get done.
When Founders don’t jump at the opportunity to show off the office, team and culture — What are you hiding? Building a strong team and culture plays a huge role in the success of your business. Even if it’s not perfect, you should invite the VC by so they can meet the other people they may be working with and figure out how they may be able out with other things as well.
Saying you’re not raising when you’re raising — We’re just all sorts of confused…But you’re starting to raise in a couple weeks? So should I not offer you money? Why can’t we just be straightforward with one another?
Evasiveness — when the founder tells a long story, with caveats, to get to a number in response to a simple questions like “What was 2016 revenue?". If you don’t know the answers to questions tell them you’ll figure it out. Different people have different views on the whole “what if I don’t know the answer?” question, but ultimately I think just be concise, direct and truthful with the investor and they’ll respect you more because of it.
Not sharing materials digitally that were previously shared during a meeting — this just becomes a pain during the diligence process and a Founders goal should be to make things as easy as possible for them to get an investment. Some Founders actually have good reasons as to why they don’t share certain materials, but for the most part not sharing them leads to a bad start in the relationship.
Being overly dilution sensitive or optimizing on price — Would you rather own a small slice of a large pie or a large slice of a small pie? Do you want value-add investors or dumb money? These questions are ones that each Founder needs to consider individually, but quite a few VCs sent over red flags pertaining to this topic.
Talking about downside protection — Let’s talk about the great things to come. Napoleon Hill once said “what the mind can conceive, it can achieve.” Founders have a long road ahead of them and we don’t necessarily want them thinking about downside protection in the early stages. Think positively.
Won’t share financials after the first meeting — Do you not have them readily available? Because that’s the initial thought that many VCs come to when you refuse to share them after a first meeting.
Talking about potential exit opportunities within the first 12–18 months — Quick exits are a tough game to play in and an even harder game to predict. Lets build a massive, sustainable business. If you happen to exit early great. That’s what most VCs want to see/hear.
Prior investors not re-upping without good reason — Possibly the first red flag you learn about in venture. If these people invested in you and believed in you before, why aren’t they investing again? Sometimes the answer is a lack of resources (e.g. angel investors), but other times investors will find out a more specific reason that ultimately turns them off.
An entrepreneur that thinks they know everything already — One of my personal favorite traits of an entrepreneur is admitting what they don’t know, both personally and about their business, but also the ability to admit their weaknesses. Stubbornness can be good in some situations, but no one likes a know it all.
Spinning information instead of giving us the facts — this happens a lot with data and deals. VCs aren’t fans of getting excited about the data presented on a chart because of the way it was presented, but when looking at the raw data realizing that things are a lot chunkier. The lack of transparency thing again will come back to get you.
When a Founder is raising seed funding but hasn’t raised from any local angels/people from their startup ecosystem — Have you hustled and made a name for yourself in your local ecosystem? Have you been resourceful and learned from some of the best entrepreneurs and investors there?
Company has been raising for more than 4 months — Unfortunately fundraising risk is a real thing. Whether it’s the founders inability to fundraise or other VCs just not liking the space, many venture firms are signal investing to an extent these days so raising for 4 months isn’t a good sign to them.
Name dropping/saying “X, Y and Z think our business is cool” — VCs do not look at this as proxy of the quality of team, product or business.
Vacationing during a fundraise — the best Founders I know didn’t take a vacation during the first couple years of their startup, let alone during a fundraise. If getting a fundraise done is such a priority and goal of yours then shouldn’t taking a vacation be a sacrifice worth making at the moment?
Being rude to office managers or receptionists — If you’re going to treat them poorly, how are you going to treat your employees?