Avoiding the Red Flags: Tips for a Successful Fundraising Journey
By Roger Roman
Unless you belong to the increasingly rare breed of founders who can bootstrap their way to success, you must start the seemingly daunting fundraising process at some point in your startup journey. When you do, you should understand that despite how much investors may boast about being disruptive risk-takers, many are really looking for the oxymoronic, risky, but safe bet. They ultimately want to ensure their investment is in good hands and will scale. So, as a fundraising founder, it’s essential to present your startup in the best possible light to minimize any red flags. A single one can signal that the company is not a good investment and scare investors away. During your pitch, investors will be on high alert for warning signs. Here are some common red flags I wish I knew to avoid as a first-time founder.
Lack of an apparent problem and solution: If your startup isn’t solving an evident problem or its answer is unclear and poorly thought out, it may raise a red flag. A startup’s product or service should address a real problem that customers are eager to spend money to solve. A lack of clarity in these areas can signal to investors that the startup has not thoroughly thought through its business model, which may lead to the inability to execute effectively. A revelation like this will undoubtedly reduce the likelihood of investment.
No traction: A glaring red flag for investors is a startup with little-to-no traction in either revenue, customers, or user growth. In most cases, investors will consider these startups too early for investment. In rare cases, founders who can show progress in other areas (like product development or team building) may be able to land an investment. However, some semblance of traction is necessary, making it easier for investors to gauge the probability of success.
Unclear go-to-market strategy: Savvy investors view the lack of a clear plan for reaching and acquiring customers as a red flag. A startup that doesn’t have a clear strategy for reaching and acquiring customers may struggle to grow and generate revenue. When a founder has a clear plan for reaching and engaging with their customers, it shows that they’ve done their homework. They know their target audience and how to reach them in the most effective way possible.
Unproven team: If the founding team lacks relevant experience or has no track record of success, it can be a cause for concern for investors. A team that isn’t experienced or hasn’t had success in the past may not have the skills and knowledge necessary to grow and scale the startup successfully. Without a solid foundation of relevant experience and a proven track record, the team may struggle to make informed decisions, navigate the complexities of the market, and execute a successful growth strategy.
It doesn’t matter if a business has one or ten employees. What does matter is whether or not the company has key team members covering essential areas. Investors find comfort in a business with a team in place, where team members practice their expertise and are authorized to oversee their area of operation. No person has the skills necessary to run a business successfully alone. Most investors do not view startup advisors with relevant expertise as an equal substitute for full time team members with that same expertise.
Weak financials: Poor financials, such as high expenses or low profitability, will also be a red flag. A startup that is not financially stable may not be a good investment. Investors will generally ask four questions: “How much do I need to invest? When do I have to invest it? How much will I get back? When will I get it?” A detailed financial projection can shed light on these questions and give investors an idea of when they will see a return on the investment and how much that can potentially be. If you are not confident in the projections, seek the help of an advisor or fractional CFO who can assist with building out a substantive financial model.
No competitive advantage: If a startup’s product or service is easily replicable or doesn’t have a unique value proposition that makes it stand out from competitors, it might raise a red flag for potential investors. A startup that doesn’t have a competitive advantage may struggle to differentiate itself from competitors, and investors might view it as a bad investment.
As a founder, it’s crucial to understand what investors are looking for in a startup. While they may boast about their adventurous spirit, they’re searching for a “risky safe bet.” To make your company more appealing to investors, avoiding any red flags that might give them pause is essential. From an unclear problem and solution to questionable financials, these red flags can signal that your startup isn’t a sound investment. By putting your best foot forward and steering clear of common warning signs, you’ll increase the chances of securing investment and taking your company to the next level. So, take the time to learn what investors are searching for and ensure your startup is in top shape to attract investment. Best of luck on your fundraising journey!
Roger Roman is the Venture Outreach Manager for the SoCal Venture Pipeline Program. Roger is a tech entrepreneur, investor, and mentor who co-founded startup AfriBlocks, which was selected as a SVP company. Prior to Afriblocks, Roger served as the Managing Partner of Push Consulting & Marketing, a growth marketing, and business development consulting agency. As a consultant, he guided fledgling startups from launch to acquisition and helped enterprise clients such as Nike, Universal Music Group, and Apple Music drive online visibility and growth. In addition to being a founder, Roger is also an angel investor and VC scout; throughout his career, he has maintained a commitment to supporting resilient founders and helping them build innovative startups.