No one believes they have an ugly baby. And all entrepreneurs are convinced that their businesses are better than the other guy’s. So chances are you’re sure (or at least really hopeful) investors will be lining up, eager to put money into your business.
Angels, VCs and banks take a more clear-eyed approach. If they see any of these five warning signs, they’re likely to put away their wallets and head for the hills.
Whether you’re looking for private equity, venture capital or angel investors, there are some common warning signs practically guaranteed to scare investors away from your business. Here are five red flags to makesure you’re not waving:
1. A weak management team. Knowing the people behind your business is one of the biggest factors in an investor’s decision to fund — or not to fund — your business. Coming up with the idea – like the next great mobile app – is the easy part. Really. What’s hard is being able to successfully execute that idea. Investors want to see a team with experience in your industry and niche, as well as a track record of success. Make sure your team is balanced so your partners or key people are strong in the areas where you’re lacking.
2. Hiding things. Investors need to know not just the good, but also the bad and the ugly. Don’t sweep the negative aspects under the rug. I’m not saying you should air your dirty laundry at the beginning of your pitch, but you do need to acknowledge the challenges you face — external and internal — and show that you have a realistic plan for overcoming them.
3. A risky industry. It’s harder to succeed in some industries than in others. You need to be aware of this reality because your potential investors certainly are. If your industry typically has a high failure rate, explain how you plan to beat the odds. Do your homework, analyze your competition and present your best case.
4. Asking for too much money. Investors want to know you’re not throwing their cash around. If the initial investment you’re seeking seems unreasonably high, they will be justifiably suspicious that you’re burning money too fast, making you a bad risk. This isn’t the ’90s; 21st-century startups need to operate lean and mean. (For more on this, see Scott M. Fulton’s Bullpen Capital’s Duncan Davidson on VC Funding and “The Era of Cheap”). Explain your financials to show how carefully you’re managing your money, cutting where you need to and spending in all the right places.
5. Unrealistic projections. Outlandishly high projections for market share, growth or profits put investors on alert that your expectations aren’t in line with reality. At the opposite extreme, if your projected profits are too low or your growth is too slow, investors will say “Meh.” They expect high returns in a relatively short time — that’s why they invest. You need to strike a balance with projections that are exciting enough to grab attention, but realistic enough to be achievable.
When your business is your baby, it’s all too easy to look at it through rose-colored glasses. Try putting yourself in your prospective investor’s shoes. If someone else asked you to put your money into this business, would you write a check?
