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<\/picture> Tim Berry<\/a> <\/p>\n5 min. read<\/p>\n
Updated December 11, 2024<\/p>\n<\/p><\/div>\n<\/p><\/div>\n
Last week at an angel investment meeting one of our group members asked whether anybody had a list of red flag problems that would immediately eliminate a startup from consideration by angel investors. That seemed like a good idea to me then. <\/p>\n
And over the weekend somebody asked a similar question in Quora:\u00a0what are some red flags for people new to angel investment when evaluating companies<\/a>.\u00a0<\/p>\n This blog post is a compilation of my own items and a lot of others contributed to the Quora question.\u00a0<\/p>\n Alternative truths don\u2019t fly. Lies, gross exaggerations, hiding significant information. Fudging past financial data. Not mentioning about or grossly exaggerating their previous business history. Omitting significant facts. <\/p>\n The pitch brags about a founder\u2019s previous successful exits that turn out, later, to have been either grossly exaggerated. Founders holding back critical information for problems of perceived confidentiality or trust. <\/p>\n Lawsuits that weren\u2019t mentioned. Cap tables that hide things. Gaps in the history.<\/p>\n For example, the scientist alone, instead of the scientist in a team with experience in the industry and business sense and experience. Or the team that lacks the CEO and is promising to get one after funding. Or the team of very young people that assigns all C-level positions to team members without realizing they need somebody else.<\/p>\n Four other good ones from\u00a0Heather Wilde<\/a>\u00a0<\/p>\n Anyone can have an idea, but if the person you\u2019re considering has no clue about what\u2019s possible, what\u2019s been done before, or even a tangentially related background \u2013 that\u2019s a huge red flag.<\/p>\n There\u2019s a certain amount of arrogance\u00a0expected<\/em>\u00a0in an entrepreneur (they need to beat down their competition), but if they aren\u2019t willing to consider outside advice or suggestions, stay away.<\/p>\n I shouldn\u2019t need to say this, but the majority of ideas are actually just bad, really, really bad. Yes, you are investing in the human, but that doesn\u2019t mean you should throw money at a bad idea in the\u00a0hopes<\/em>\u00a0that something they come up with\u00a0later<\/strong>\u00a0might be good.<\/p>\n This is like one of those logic puzzles. Every time I hear someone say \u201cwe have no competition\u201d it immediately is a red flag, for two reasons. One, it\u2019s a sign they haven\u2019t done their research, because there\u2019s\u00a0always<\/em><\/strong>\u00a0competition, or at least something comparable. Two, it\u2019s a sign they might be naive enough to actually think it\u2019s true. Either way it\u2019s a sign to stay away.<\/p>\n Four more from\u00a0Greg Brown<\/a><\/p>\n Awesome team in a small market can figure out how to expand the market opportunity. Mediocre team in a brilliant market will produce mediocrity. Bet on the team.<\/p>\n Legal and financing structures that violate the norms are non-starters for me. No need to reinvent the wheel.<\/p>\n If a company is pushing too hard to get your investment that\u2019s a bad sign. If it doesn\u2019t yet feel right hold off. It\u2019s OK to miss out on something. There will be other opportunities. You cannot ride every unicorn.<\/p>\n Bad co-investors suck. Bad means fundamentally bad people or people who will provide bad advice or influence. Most founders will to some degree bend to the will of their board\/investors. Make sure they will be getting good advice.<\/p>\n And a bunch from\u00a0Terrence Wang<\/a><\/p>\n Sending decks are standard unless you are a Siri co-founder working on Viv. VCs want financial models. If you are investing later seed then the startup should send you a financial model where you can see the assumptions and play around with the variables to test different scenarios and outcomes. If founders won\u2019t send you both, red flag.<\/p>\n At present the vast majority of finders, brokers and enthusiasts who connect founders and investors are working with non-great founders. Red flag.<\/p>\n Peter Thiel is advising a PayPay mafia cofounder-CEO. The CEO pitches fellow angel investors and me. We ask if Peter is investing. The CEO says he wants to be careful about asking Peter to invest.\u00a0So why are you pitching us then?<\/em>\u00a0Red flag.<\/p>\n If someone loves a startup\u2019s product and service, that could be because the product is free and a good time filler. Doesn\u2019t mean they will spend money on the product or service. Maybe they don\u2019t need the product. Red flag.<\/p>\n A great product with bad sales is often a bad sign. For example, a startup might have a great e-commerce product but Amazon is going to out-sell them about a billion to one. If the product is easily monetizable and they haven\u2019t even tested monetization, that is a red flag.<\/p>\n Some angel investors don\u2019t want VCs involved later. This includes at least a couple Harvard Business School Angels who invest in startups that should not need VC funding because the startup is in a smaller market and should get to break-even pretty quickly. But does the founder agree? If you and the founder don\u2019t agree on the financing goals, that is a red flag.<\/p>\n If the CEO does not have grit, the startup likely won\u2019t work. Red flag.<\/p>\n CEOs need to be persuasive, regardless of context. They don\u2019t have to be high energy. Elon is more reserved but still charismatic and persuasive. Uncompelling pitches are a red flag.<\/p>\n Talk to the CEO and other core team members individually. Are they on the same page as the CEO? If not, red flag.<\/p>\n Has the CEO built and led a team successfully before in anything? Sports, clubs, etc.? Her siblings? Anything? If not, red flag.<\/p>\n If you have unanswered questions that are important to you about anything related to the startup, the team, the legal documents, etc., make sure the CEO or someone from her team who\u2019s authorized (e.g., her law firm) answers your questions to your satisfaction. If you feel pressure to not ask too many questions, just ask this one<\/p>\n Does the CEO do things that are highly unethical or technically crimes? If so, you may have a Theranos or Zenefits on your hands. Red flag.<\/p>\n Like this post? Share with a friend!<\/p>\n<\/div>\n Tim Berry is the founder of Palo Alto Software<\/a> , a co-founder of Borland International, and a recognized expert in business planning. Tim is the originator of Lean Business Planning<\/a>. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning. His full biography is available on his blog<\/a>.<\/p>\n<\/p><\/div>\n<\/p><\/div>\n<\/div>\nLack of domain expertise<\/h2>\n
Legal and ethical issues<\/h2>\n
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