- Due Diligence Red Flags - www.PitchStreet.com
Yesterday, I gave you a due diligence checklist to help you prepare for when an investor is seriously contemplating investing in you. Today, I will explain to you what angel investors consider to be "red flags" when they are preforming a due diligence to the entrepreneurs on PitchSteet.
Entrepreneurs who do not invest their own money in the venture
Why would an investor put money into your company, if you have not put in any of your own capital? If you are not willing to risk your own personal money, most investors would take this as a lake of confidence in your initiatives. It just makes sense that the angel investor would not take you seriously and drop your investment right there.
Entrepreneurs with small amounts of numerous investors
If you have many inexperienced investors, angel investors would see this to be problematic, and not take your venture seriously. However, if you have family and friends investing, that would be different. But when you are looking for investments, only take those that are experienced and in large amounts. This shows that you aren't just taking money from everyone and yo are serious about this venture as well.
Lack of product diversity
A company should have
some diversification of goods and services to be successful. If you only have one product and it fails, then so does the whole company. Angel investors like to see numerous products and services, a backup plan.
Claims of “no competition”
It is impossible to have "no competition". Especially in this day in age, there will always other companies to compete against. You will need to do a market and competitive research before you introduce your company to investors. Angel investors look for your competitive advantage in every company, meaning you will have to present why your products and services are better.
Other debts and existing liabilities
If an investors discovers during a due diligence process that you have other liabilites and are in debt, thsi will indicate to them you have poor financial management skills. He might assume that a portion of his investment might go towards paying off your debt and to other investors. He is investing in your company, not to pay off your bills.
Lack of participation of early investors
If no one else wants to invest in your company, it must mean that the angel investor is looking over something. If past investors do not want to reinvest, then interested angel investor will conclude that your company won't be able to pull through.
Poor management history and unsettled management team issues
The management team can determine the success of a business. If your team does not have any experience or a track record of making mistakes, the angel investor will most likely steer clear of your investment. They like businesses with a strong, well-rounded management team.
Most angel investors don't mix family with business. Often at times, there is too much drama in the workplace when family is involved. Business owners will sacrifice hiring experienced workers by keeping their family on board, which can effect the productivity and success of the business.
Predicting exceptional projections
The market is all over the place, and it can never be confidently predicted. To forcast exceptional financial projections for company is very unrealistic. Also know as "hockey-stick" projection growth. Keep it real, and keep in mind that surprises can happen in the market.
Angel investors expect you to take the financial skills as seriously as they do. If these has been no hiring of advisors, or inexperienced advisors involved, they will take this a red flag. If there is any doubt in the financials, then the angel investor will doubt you.
Lack of board of advisors, board of directors, or the presence of only internal parties
If you do not have an experience board team, angel investors will question your leadership and credibility. You should also be asking external board members for advice to get a second opinion on your company's ideas.
Controlling business owners
Employees are a very important factor in businesses. When a business owner is too agressive and controlling, it can cause an uncomfortable work place for the employees as well as the investor. This can decrease productivity if the employees cannot focus on their work. Angel investors like to avoid the companies with a business owner that is controlling.
Unrealistic valuation for the company
If you request an too much capital, this can signal a problem to the angel investor. Not only does it show you have an unrealistic view on the company, but you and the angel investor have huge differences.
In business, there will always be negotiation, you cannot avoid them. However, if you create a contract that is not favorable in any terms to the investors, the will take this as an indication that they cannot work with you.
Intellectual property protection/ownership problems
Angel investors don't want to deal with problems they don't have too. Straighten out all of your issures concerning protection and ownership rights for all their products and properties before seeking angel financing.
Pending regulatory issues
If you have any pending regulatory issues, this can stop or slow down the success of your company. Angel investors will steer clear of your investment.
And there you have it, these are many red flags you should be aware to resolve and fix in order to raise capital for your startups.