5 Red Flags That Investors Looks for In A Startup Deal
The world is full of scams, doomed start-ups and bad investment opportunities and most investors can sniff out a bad deal through one conversation or pitch. All investors want to be confident that you’ll be able to lead your company to success, ultimately generating a return on their investment.
To give your potential investors the confidence that they need to invest, be sure to avoid the following red flags.
- You haven’t done your homework – Do you know how well your industry is projected to do in the next couple of years? Have you thoroughly worked out your financial projections? Doing your research and being ready with answers to the most important questions that you may receive from your investors will show them that you know what you’re doing and that you can move forward successfully with their funding, or maybe even without it. By exhibiting that you know your business and the industry in which it operates inside-and-out you can give a potential investor the confidence they need to invest.
- You’re too optimistic – Investors need you to be real with them, which means you also need to be real with yourself. What are some challenges your business might face, especially in the first couple of years? Will it take some time for the business to get running the way you envision it to? Do you already have an established consumer base? When investors see that you refuse to ask important questions or that you are convinced that everything will be smooth-sailing, it’s a major red flag. It’s best to be honest with yourself and with the investors, showing them that you recognize the challenges but also that you have a plan to overcome them.
- You have a dysfunctional and inexperienced founding team – One of the most unattractive qualities to investors in a venture is a founding team that is unprepared, underqualified, and incohesive. Would you give your money to a dysfunctional group of people who you could clearly see didn’t get along? As important as it is to have a solid business plan, it is equally as important to have a solid team of people backing up that plan and putting it into action. Investors are farther likely to provide you with the funding you need if they see an experienced team working to carry out a reasonable growth strategy.
- You claim that you don’t have any competition – Even the largest and most successful businesses have competitors. Walmart has Target. Microsoft has Apple. Starbucks has Dunkin. Big or small, competition drives markets and forces businesses to keep innovating in order to stay alive. Although it is important to show that you are bringing something new to the market and that your business model is different from those that already exist, ignoring your competition shows a lack of research and planning. Creating a plan to more attractive, unique, and create better products than your competitors shows investors that you have thought about the market in-depth and have evaluated how your competitors are going to affect your business.
- Having a weak marketing plan – Without a concrete plan to attract the right customers, your business cannot succeed. A weak marketing plan shows investors that you haven’t thought through how to effectively sell your product or service. Show them that you have identified your target customers and created your marketing strategies according to those demographics