By Contributing Author
Successful VCs have a long and comprehensive list of warning signs that they watch out for when evaluating potential investment opportunities. Similarly, startups need to be alert for symptoms that a potential VC relationship could — and probably will — turn into a costly and stressful nightmare. Here are five red flags to watch out for:
- The VC does not ask questions about money.
It is common knowledge that in a job interview, candidates should (usually) not ask about salary — at least not until the second or perhaps even the third interview. This protocol absolutely does not apply in the VC world.
At the very first meeting, the VC should ask how much money you need, how much money you have raised (and from whom), and what you need additional money for. If they don’t then they are essentially on a fishing expedition. Do not take the bait. Disengage and move on.
- The VC focuses mostly (or entirely) on them — not on you.
Obviously, you need to know about a potential VC’s background. In fact, before the first meeting you should do your homework and understand their history, approach, experience, and so on. But once the meeting starts, if the VC grabs the proverbial microphone and refuses to give it back — droning on and on about themselves and what they do — then you can be assured that they are not going to be good partners. In fact, they may be analysts doing market research instead of legitimate investors. Watch out for this!
- They waste your time and disrespect you.
If a potential VC cancels a meeting without suitable notice, or worse, if they “ghost” on you (i.e. they fail to show up at all), then that is more than a red flag: it is a loud warning siren. Your time is valuable, and you literally cannot afford to have it wasted. Of course, last-minute emergencies can happen. But unless there was an accident, injury, illness, or some other major event that prevented the meeting from happening as scheduled, then you need to read between the lines and realize what you are being told: that you, and your business, are unimportant and not a priority.
- They position themselves as your only option.
If they are interested in partnering with you, legitimate VCs will, quite understandably, pitch themselves as strong partners. But only amateur or incompetent VCs — and there are plenty of both types out there — will suggest or state that they are your only option. This is simply not true. You have options. For example, if you are facing a cash flow crunch you may be able to file for bankruptcy and restructure your debt vs. seek VC funds to stay afloat and get things back on track.
- They will not say yes or no.
Successful and sophisticated VCs will quickly give you a yes or a no — and if it is the latter, they will (also quickly) tell you why. For example, you may not fit into their investment portfolio, or they may have concerns about your valuation, the level of competition, how much money you will need vs. how much you are asking for, the time it will take to get your product or service to market, and so on. Regardless of the reason or reasons, they will quickly get to the heart of the matter and give you a yes or a no — if not in the first meeting, then very soon thereafter.
The Bottom Line
Naturally, the above are just guidelines — they are not rules. However, they should be used along with your own experience and judgement to help you objectively determine whether a potential VC is going to be part of your startup’s financial solution; and not add to your challenges and problems!