Sometimes the red flags that are hardest to spot are the ones that aren’t there - at least, not on the surface. If a startup pitch omits information that you would expect to see, that should be a signal to dig deeper. For example, the startup may not specify their use of funds because they don’t want to highlight that the founders are taking cash off the table. Or they might bury their net income projections in an appendix slide because it will take them a long time to be cash flow positive, and instead only highlight more impressive top-line revenue numbers. Of course, sometimes omissions are just omissions - just because something isn’t discussed doesn’t mean it’s necessarily negative. It’s your duty as an investor to have a list of what you expect to see and ask questions about anything that might be missing, so that you can make a fully informed decision.
Many less experienced investors get enamored with how awesome the product sounds or how large the potential market seems, without really understanding how the startup will sell the product or how it will generate revenue. Less experienced investors may not delve into who the customers are and what customer problem the product solves. They may not ask why customers would buy the product or switch from a competitor's product. They also may not pursue how the startup will acquire and retain customers. Seasoned investors tend to focus on the customer, the market and the business/revenue model. They are more interested in how the startup will generate revenue and profitability, and are less enamored with overhyped market sizes and unsupported projections.
Red flags in startup pitches that might not be obvious include: 1. Love for product, but, no clue for GTM or sales 2. Building too many SKUs or features instead of focusing on one pain point 3. Founders should have defined areas of responsibility maybe coming out from their background or experience. If all founders have single job, it might lead to dispute in future. 4. Clarity and vision for the product.
Chief Marketing Officer at Scott & Yanling Media Inc.
Answered 2 years ago
One big warning sign I've learned to spot in startup pitches is when they don't talk much about how much it costs to get new customers (that's called customer acquisition costs or CAC) and how much value those customers bring over time (that's the long-term customer value or LTV). Startups that skip over these details usually don't fully grasp how tough it can be to grow in a way that actually makes money in the long run. I noticed this by watching startups that got investment but then struggled later on. The ones that didn’t have a clear plan or understanding of their CAC and LTV often ended up using up their money fast without a solid strategy for making a profit. Paying attention to these numbers has helped me lean toward startups that seem more prepared for real, sustainable growth. It's a small detail that really shows if a team knows their stuff and has a good grip on what their market looks like.