TIGER Talk Recap: Avoiding Investor Red Flags
Investors such as Rev1 Ventures are always interested in learning about new investment opportunities. If you’ve got an exciting new idea and are considering pitching it to an investor, you should be aware of what investors might consider “red flags” in your business that may make them wary of investing in your new venture.
Ryan Helon, executive vice president of investment funds at Rev1 Ventures, presented “Avoiding Investor Red Flags” at Innovate New Albany’s TIGER Talk on June 16. TIGER Talks are held free of charge throughout the month and educate business owners on the topics of technology, innovation, growth, entrepreneurship and responsibility.
Ryan said there are three main areas of a business pitch that could raise red flags to investors such as Rev1 Ventures:
- Business organization
- Business or deal fundamentals
- Personal matters.
Key decisions you make as you form your company early on can raise red flags with investors. Some of those situations include:
- Prior, current or pending litigation involving founders, company or key management or partners. Litigation is a distraction and takes time to resolve. Disclose it early on and determine how soon it can be resolved.
- Harmful pre-existing agreements with employees, vendors, partners or shareholders. Be careful about offering your first customer exclusivity. Vendors will give you services in exchange for equity, but sometimes those agreements can be problematic.
- Complex shareholder agreements. Investors want to see a streamlined process for decision making, such as majority rules instead of trying to get a consensus.
- Issues with intellectual property such as patents, licenses, and ownership.
- New capital for paying off old or previously incurred liabilities. Investors will not usually be willing to pay off liabilities, such as credit card debt and loans from founders or investors.
Business / Deal Fundamentals
Situations within the core of your business that may trigger red flags with investors:
- Inexperienced first time entrepreneur. Be prepared to explain why you are the right person to start this business, and what experience, knowledge, or background you have in a certain industry that will make you successful.
- Insisting on a nondisclosure agreement. Most investors won’t be willing to sign it, so don’t make it a requirement.
- Lack of alignment: Valuation.
- Lack of alignment: Investment Terms.
- Strategy not compelling or competitive. Be prepared to explain the merits of the business, an assessment of your team, and why you are competitive.
- Business strategy that doesn’t scale.
- Competition is too far ahead. Too many people are doing the same thing. Breaking into an established market is difficult.
Personal situations with you or your partners that raise red flags with investors:
- Prior arrests or convictions
- Concerns of ethics or character
- Receiving conflicting information from the entrepreneur. Be organized, have all the facts and stick to them throughout the process.
- Being difficult to work with or un-coachable
- Prior bankruptcy or financial distress. If you can’t manage your personal affairs, an investor will question how you will manage the business.
- Reluctance to acknowledge, hire, and compensate missing expertise. None of us can do everything well. You need to have a plan to support the gaps in experience.
- Lack of alignment: Founder compensation. An investor will probably not be willing to fund founder compensation.
- Husband and wife team (or family). This could cause conflicts of interest.
- Authorization to work/immigration status. Be sure you and everyone in your start-up are authorized to work in the U.S.
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