5 Red Flags of Startups

5 Red Flags of Startups


JD - warning signs

I hope you have all been enjoying the series through the Wasabi Ventures Academy thus far. Personally, I’ve found it to be a great refresher tool on the startup world, and I wanted to turn what I have learned into a resource for all of you who find yourselves treading down the path of entrepreneurship. Also, I want to go ahead and thank you all for the personal texts, emails and messages I’ve gotten as feedback for my posts. At the end of the day, it’s you guys I write for, so please feel free to contact me if there’s a topic you’d like me to discuss, or if you would just like to chat.

Although this marks the end of the six part series on venture capital and the startup world, I will continue to post almost daily on similar topics, so please come back to keep up to date.

With that being said, let’s turn our attention over to our last (but certainly not least) segment: The 5 Red Flags of Startups.

Often times throughout our daily lives, we encounter entrepreneurs who are working on the next big thing. As an investor, you probably meet many of these ambitious characters yourself, but struggle when sorting through all of them and their different startups.

Venture Capitalists invest in one deal for every hundred they see. With that much deal flow, how can one streamline the process so that more viable candidates are left for your investment?

One quick and easy way is to quickly refer to the “5 Red Flags.” This can be a resource not only for investors, but also for you, the entrepreneur enabling you to be more aware of how investors might perceive you and your startup. They are:
1) The founder(s) always feels the need to be the smartest person in the room.

Smart People need to be Humble:

  • This means they usually have a hard time listening to customers
  • They tend to be poor managers
  • They think the whole world is like them
  • They think that being smart is all that matters
  • They always think that they must have the answers to all questions

As a startup founder, you will make frequent pivots on your journey. You will be wrong. Occasionally, you will make mistakes and make poor decisions. The founder needs to be cognizant of these elements, be agile and enduring of these difficult situations, and know when to seek help. It’s crucial to have an open mind and be aware of all possibilities. 

2) Target audience/Customer is other startups.

Startups Make Bad Customers:

  • They never have a lot of money
  • They tend to think they can build anything themselves
  • There aren’t that many of them
  • They tend to disappear

This is all pretty self-explanatory.

3) You, as the investor, are not passionate about the startup.

Why it’s an issue:

  • If you don’t get a great feeling, it isn’t worth caring about, and definitely not worth investing in
  • The people involved weren’t inspirational
  • You don’t have a personal vested interest

If you can’t see yourself excited about the startup enough to the point where you’d bring it up in conversation with buddies during happy hour – cross it off the list.

4) Measurable expenses for Lawyers, Accountants, Real Estate.

There is no ROI here

  • Shows that a startup is focused on the wrong things
  • Can’t usually be zero, but needs to be close to zero
  • Early Stage: it needs to cost less than lunch per month
  • None of these make a company more valuable, they are just necessary evils

Startups should be focused on product development, gaining customers, and growing the business – and their costs should reflect that. It just does not make sense to see a projected income statement for a startup with immense costs from legal, accounting and rent expenses. 

Would the Founder Pay for this?

Are the founders passionate?

  • They aren’t passionate about the problem
  • They don’t understand the problem
  • Have zero credibility as an authority in the space

The founder will be putting in tons of hours a week building this startup. They are the ones who will be bringing this idea to life to solve the pain point that they had resonated with. If they show any sign of these bullets, then they are probably not worth the look. 

Please keep in mind that none of these flags are 100% disqualifiers, but any instance of one of them should make you cringe as a co-founder, investor, or interested party. The beauty is: these warning signs are universal and not dependent on any vertical, geography, or technology.

Keep hustling, my friends.

Reprinted by permission.

Image credit: CC by Ben Schumin

About the author: Rayyan Islam

A former Wall Street investment banker, Rayyan Islam provides “edutaining” wisdom to AlleyWatch readers from a youthful-heart-wise-mind perspective. Rayyan’s passion to positively change the world has brought him to become a traveling tech entrepreneur, venture capitalist, Google Glass developer, writer, and co-founder of a Los Angeles-based public relations firm. When he’s not consulting start-ups or watching Dallas sports, the young executive and fashion connoisseur cooks, reads and partakes in adventure sports with friends.

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