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7 Startup Red Flags That Freak Out Investors

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Before approaching investors, be sure to check yourself before you wreck yourself. And by “yourself” we mean your startup.

Your startup may be your baby, but to someone who doesn’t want to lose money, it’s one of many companies with a dream until proven otherwise. There are several red flags investors look out for when determining whether a startup is worth the risk. Ensure yours is free from all of them.

  1. Excessive Founder Salaries

People want to fund your idea, not your lifestyle. If your proposed budget includes excessive salaries for your founders, it’s a red flag.

So how much should you pay yourself? Compass found that 75 percent of founders in Silicon Valley pay themselves less than $75,000 per year and sixty-six percent pay themselves less than $50,000 per year.

If you were planning to award yourself a six-figure salary as an early stage startup looking for investment, think again.

  1. An Undeveloped Marketing Plan

A good marketing plan needs more than a value proposition, proposed pricing, and a line or two about how you’ll spread the world on social media. You need a well-developed, detailed document proving that you understand your competition, what sets you apart, and the financial, technical, and human resources you’ll need to execute an effective marketing strategy.

You can get started by ensuring your marketing plan covers these seven essential areas as outlined by Inc:

  • Market research
  • Target market
  • Positioning
  • Competitive analysis
  • Market strategy
  • Budget
  • Metrics
  1. Jargon-Heavy Pitches

A healthy understanding of industry lingo is one thing, but a confusing, convoluted pitch that doesn’t clearly convey your startup’s idea will leave an investor at best confused and at worst frustrated. Leave aside the complicated lingo, and explain why your company is awesome in very simple, straightforward language.

People respond to jargon in different ways. To some, it’s impressive. To others, it’s a sign that you don’t really know what you’re talking about. Additionally, jargon and buzzwords change all the time, so don’t assume everyone will find your words impressive or descriptive. Keep them to a minimum and focus on telling an impressive story grounded in reality.

  1. An Underwhelming Founding Team

Founders should complement each other, not compete with each other. A diverse mix of skills among the team in tech, business, marketing, and operations helps you save money on hires in the early days.

It also helps limit conflict if everyone has the final say on a certain area of the company. If you’ve got a team made up of people who are all experts in the same thing, you’ve got a recipe for conflict.

One Harvard Business School professor’s research found that 65 percent of startups fail due to founder conflicts. Throwing money into the mix only adds fuel to existing flames, and no investor wants to watch their money burn.

  1. Limited Understanding of the Competition

Blindly charging forward without knowing who else is out there is frequently cited as one of the top reasons startups fail. Investors view startups with a poor understanding of their competition as deluded or unprepared. Neither is a good look. Too many startups claim “we are the first to do X”, which is almost never true. Accept that you have competition today, and that you will have even more competition if you are successful.

Conduct a competitive analysis for a comprehensive picture of what’s out there. A competitive analysis sounds like an intimidating task, but the results may pleasantly surprise you. Yes, there’s the chance you’ll find several other companies are doing what you’re doing and marketing their services well. But you also may find that they aren’t meeting a specific need, thereby presenting your company with interesting opportunities.

  1. No Financial Forecasts or Projections

Projections are a pain. Since you can’t predict the future, your next best bet is referring to historical data. If you’re a startup, you can’t do this, so your other option is to break down how you will drive revenue (e.g., which channels, what types of customers) and what you think it will cost to acquire that revenue. Your assumptions may be completely wrong, but at least you have something to discuss and update as time goes on.

To offer a well-rounded picture, consider multiple scenarios, start with expenses, and paint a picture of your sales process as this Entrepreneur article recommends.

  1. Bad Money Management

Blowing money on consultants and web designers? It’s a sign that you don’t have the technical know-how among your founding team to get your product developed or manage your company. It also suggests that you aren’t resourceful enough to find the information you need or use cost-effective tools. Avoid looking like a spendthrift startup.

The good news is that every single one of these red flags is fixable. Just make sure you fix them before pitching your startup to investors. If you waste their time once, they may be hesitant to speak with you in the future. Know your competition, put together a smart team, and spend your money wisely.

 


 

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