July 24, 2019

what red flags would make you reject a startup immediately?

Steven Cardinale

Steven Cardinale
CEO/Liquid Animals

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This comes from a question posted on QuoraAs a venture capitalist, what are some red flags that would make you reject a startup immediately?

When I’m listening to a team looking for investment, there are a couple of hard No’s that they’ll get quickly if:

  1. They can’t easily articulate a tightly focused customer segment that will have interest in their concept. Saying that everyone will use this product is just as bad as saying no one will use this product. Knowing your initial market segment well in advance is a prerequisite for getting at least the smallest handle on whether the dogs will eat the dog food.

  2. Overestimating market size. I’ve heard pitches that say the market is the entire fitness industry, or all mom’s, or $600B. And while I am sure those ARE markets, they aren’t THE market for any company looking for VC funding. Having a large market ($1B+) is vital for any investment. But you have to really know and be able to articulate your market opportunity. If you can’t and just say “everyone will love this product” it seems like you haven’t done your research.

  3. Too confident. If someone says they “have the best developers in the world” or “their marketing team is only from A shops and can knock it out of the park” or “they’ve never made a mistake” then usually that arrogance will get them in trouble down the road. And that means a hard No. Having the confidence to accomplish goals is different than hubris. And hubris will end up with management making bad decisions.

  4. Valuation is ridiculous. I’ve seen pre-revenue pre-customer companies setting valuations at $600M+. A.) If this is a unicorn and I just don’t know it yet, the RaR on such a deal is so small and the only way to generate a return is pure luck (ie. this is Uber) that the over-valuation is a massive red flag, or B.) This is a bad deal with a team that hasn’t done their research on valuations. And if you haven’t done your research on valuations, that in itself speaks volumes on the lack of prep on the team

There are many, many other red flags that’ll immediately get a no. Remember investors are not in the business of taking giant risks. They are in the business of finding outsized opportunities to generate Risk-Adjusted Return where the risk is the lowest they can find for the highest return. That means finding companies at their inflection points just prior to rapid growth but whereas much of the risk that can be mitigated, is mitigated.

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