Investor Red Flags

Obtaining significant investment is one of the hardest things your business can ever do.
Since there’s so much at stake (literally millions of dollars), investors are right to be wary – they want to feel confident in the team who will be using their money.

Investment is art and science – a combination of profits, projections, people and personalities.
The hard part is that only some of those things can be detected on a spreadsheet.
So how do investors spot issues ahead of time?

They look for “Red Flags” – important yet subtle indicators that highlight deeper problems.
Some are to do with passion and discipline, others are to do with capability and chemistry.
Here’s what they look like:

Hot Headedness
There’s something deeply unsettling about seeing someone lose their cool.
Doubly so if it’s over something minor.

Anger is one thing, but rudeness is another.
Investors want to see a calm, flexible mindset, because they know for certain that bigger hurdles lie ahead.
A founder who is prone to outbursts becomes a liability.

Personal Mastery
Does the team know how to get things done?
You’re allowed to be weird, if your weirdness is effective.

Work wherever you like, at whatever time of day suits you.
But if you’re constantly running late and are never on top of your priorities, people will worry about your…quirks.

Staff Relationships
One of the truest signs of a leader’s character and competence is their reputation amongst their team.

These are the people who see the management team at their best and their worst.
If they are expressing concerns about the direction of the company, or the behaviour of the leaders, investors will take it very seriously.

Financial Literacy
Here’s the assumption – your executive team knows how to read and prepare a financial statement.

I’ve never seen a leader who has accidentally run a profitable organisation.
Nobody flukes a decent margin; it’s the work of careful thinking and conscious planning.
If an investor senses that you don’t grasp your own financials, then you’re either a miracle or a potential disaster.

Personal Reputation
When you start up a new business, you are the brand.
People who respond positively to your company are really responding to you.
You’re the face of the company, and every bit of marketing and graphic design contains your DNA.

This is a huge strength, and cuts both ways.
If you have a questionable reputation – either from previous projects or defamatory articles at the top of Google, it will make them think twice.

Business Reputation
Sites like TripAdvisor, Zomato and Google are tell-tale signs for investors.
It’s one thing to claim that customers love you, it’s another to see real, objective proof.
These sites are concerningly influential, so a series of negative reviews will make prospective partners question their involvement.

Communication
Good news – if not communicated – may as well be bad news.
Total silence is deeply unsettling, as any parent of a three-year-old will know.
Even updates that state that “there is no news” are appreciated.

"Do What You Say You Will Do"
There’s something awesome about people who are dependable.
The ones where their word means something – they’ll make a promise and you know it’s going to happen.
This trust is easily broken – taking years to form but only moments to destroy.

Good results are impressive, but not if they come amidst a series of claims that never panned out.
Better to under-promise and over deliver than to be technically competent but deemed unreliable.

Financial Transparency
It’s not that investors want to trawl through your bank statements, it’s just that a reluctance to show them sets off alarm bells.

Accounts are notoriously hard to decipher.
Don’t make things worse by refusing to release them, or as one entrepreneur told me
“Sorry Isaac, I don’t want you seeing them until I’ve had time to massage them”.

Full Disclosure
We’ve worked with some colourful characters over the years.
One that stands out is a former juvenile offender who, having changed his ways, was committed to helping others to get back on the right path.

In our first meetings, he disclosed his past life, where it became a strength instead of a weakness.
Had that news come to light in a different way, we would have probably walked.

The Airport Lounge Test
“People do business with people, and they do business with people they like” – Denis Kiellerup

Let's say you have a four-hour stopover in an airport lounge.
Are you happy to spend it sitting with your entrepreneur/investor?
If the answer is no, there’s an issue.

You’re about to go through some confronting experiences together; late nights, stressful decisions, emergency board meetings, long conversations over a bottle of red.
If you find the other person irritating in the early days when things are rosy, imagine what it will be like when the tough times set in.

If you enjoy this topic, you'll love The Art Of The Start 2.0 by Guy Kawasaki, and the blog of venture capital firm Andreessen Horowitz.