As a veteran in the tech sector with over three decades of experience and a venture capital investor since 2015, I’ve evaluated countless startups across Europe, the US and Central Asia.
To date, I’ve backed 52 ventures, focusing predominantly on technology companies. In 2023 alone, my investments spanned 19 projects, totaling nearly $4 million.
Each month, I scrutinise 20-30 investment proposals. But, only 5% secure my backing. And that’s because many fail to meet my stringent criteria for backing a business, and typically deter me because of one or more red flags.
If you’re looking to pitch to a VC or angel investor, you’d do well to avoid similar notes of caution. To help guide you, these are the key red flags that often dissuade me from investing.
Red flag #1: misconceptions about product market fit
Once, I was approached by an Indian company. They proudly touted having renowned professors from the US and Mumbai on their board. Impressive, right?
But when I asked about their business model validation, they relied on academic endorsements.
Here’s the thing: no matter how prestigious the endorsement, real traction comes from actual users. I need to see solid metrics, and that means sales, promotion, conversions, and unit economics over at least six months.
If people find value in your product, they’ll pay for it. If you’re not making sales, it’s time to rethink.
Founders often tell me, “Our retention and LTV metrics are low because we don’t have enough users yet. With a million users, it’ll all fall into place.”
That’s an illusion.
If your product doesn’t work on a small scale, then scaling up won’t fix the core issues. For a startup, a 40% annual growth rate might sound great. But I’m looking for at least 20% monthly growth.
Small numbers are fine. It’s the momentum that counts.
Red flag #2: addressing irrelevant problems with poor customer development
A startup must tackle a genuine problem. Lack of competitors can also be a red flag, indicating either a non-existent problem, or the problem can be solved another way.
It’s important to have good and deep Customer Development (CustDev). Simply talking to two or three acquaintances in search of this problem is not enough.
Effective CustDev involves conducting at least 30 in-depth interviews to uncover real user insights and pain points. Decisions grounded in real customer feedback are more likely to succeed than those based on assumptions or minimal market interaction.
Once, a group of founders approached me with software designed to detect employee burnout. Their target market was large Southeast Asian corporations, where gruelling 12-hour workdays often lead to burnout and high turnover, severely impacting business performance.
They initially validated their product by interviewing HR managers, who confirmed the software’s value. However, during these conversations, another significant issue emerged: a glaring lack of leadership programs for mid-level managers.
While top executives had such programs, mid-level managers were left without support. Seizing this insight, the founders pivoted, using their software to identify employees with high career growth potential and addressing this new pain point.
This strategic shift propelled their success.
Red flag #3: founders lacking industry expertise
When founders lack industry expertise, the likelihood of their project’s success significantly decreases. Take, for instance, a team building a startup in the field of psychology. If one of the founders has spent a decade in the industry and understands its nuances and challenges, my confidence in the project increases.
If such expertise isn’t present, I then inquire about the startup’s advisory board.
The founder must present a genuine expert with 10-20 years of experience in the field to reassure me.
Red flag #4: founders unwilling to admit mistakes
Periodically, I encounter founders who struggle with taking criticism. They find it hard to admit mistakes and often cling to a single hypothesis, treating it as the ultimate truth.
However, making an idea work requires testing multiple hypotheses (typically 5-10) adapting the model, and sometimes making a pivot. Some founders, however, get stuck on one idea, persistently pushing it even when it’s not yielding results.
Beyond the product itself, there are crucial aspects like team dynamics, marketing strategy, and identifying key enablers. Experienced investors can often highlight blind spots, but not every founder is open to listening.
Entrepreneurship is a talent. While I value entrepreneurial experience, it’s essential for founders to remain flexible. This flexibility ensures that their experience aids, rather than hinders, the startup’s growth.
Red flag #5: toxic investors in the cap table
Toxic investors can be those with unverified income sources, under sanctions, or imposing unreasonable conditions. Another critical factor is the equity stake they seek.
Here’s a typical scenario: a novice investor or someone from a non-venture capital background offers a startup $1 million upfront for a 30% stake. This can be a tempting offer for founders, but in my experience, such deals rarely end well.
At the pre-seed stage, no investor should receive more than 10% equity. There will be many funding rounds ahead, and if a founder gives up a large share early on, they risk losing motivation to continue. It’s essential for founders to maintain control of their business. The founder should always prioritise their stake, with investors taking a secondary position.
By round A, even if some dilution occurs, the founder’s stake should not drop below 50%.
Know what your investor wants to see
Now you’ve understood my red flags, you can well imagine what I want to see in order to pique my interest for investment.
Founders must deeply understand their market, demonstrate competence, rapidly test and adapt hypotheses, and remain flexible in the face of changing conditions. Their product should be validated and possess the potential for 10-100x growth.
Even after rejecting many founders who showed me a red flag, I remain eager to meet teams that meet these criteria and discuss their projects further.
In my 30+ years in the tech business, I have been fortunate to build dozens of successful projects, and in my decade’s worth of experience as a venture investor, I have made investments in 52 innovative startups, which are represented in the markets of Central Asia, Europe, and the USA. In total, I have invested in the region of $25 million in startups and have had over 10 successful exits.
