Stop Scaring the VCs - Red Flags to Avoid

Everyone has red flags they look for when dating. If the other person looks presentable, if they treat the servers nicely, if they can hold a steady job if they have friends….and the list goes on. 

Venture capital is very similar to dating. VCs and founders are looking for a good partner to work with since they will need to work together for the next 8 – 10 years. We have seen fund managers pass over incredible deals that they also realized simply because they could not see themselves working with that founder for such a long time.

On the other hand, founders need to know what many VCs are looking for when it comes to red flags. Just like someone on their first date, new founders can easily scare away VCs with well-meant comments. Here is our top 5 list of red flags VCs look for in presentation:

1. Exit Plan. NEVER include an exit slide on the pitch deck. As a founder, you may think that VCs would love a “get rich quick” deal. However, they have seen thousands of similar promises and know that the true winners take time and effort. If you promise a quick exit, it signals that you are not interested in being with the company through the tough times and will jump-ship as soon as the waters turn rough. If VCs are what you think an exit plan can be, then discussing the types of firms that would be interested in buying or how you imagine an IPO is fine. However, assuming this will happen quickly conveys a terrifying level of overconfidence.
2. Unpolished Deck. This will usually keep you from having a first meeting at all. It signals a founding team that the founding team does not have enough time to work on the startup, the inability to focus on details or know which skills they need to outsource to create a quality product. VCs will assume that if your deck is low-quality then the product you are building will have a similar low-quality interface that customers will hate. It is completely fine to outsource the deck creation if your team does not have that skill, but building an in-house low-quality deck is a major red flag.
3. No Sportsmanship. This is a common mistake that is usually made by teams where one founder is technical-oriented, and the other is sales/business-oriented. In this case, the business-focused founder will overshadow the technical founder for the entire presentation – barely giving him/her time to speak. We have even seen the business-founder answer questions about the technical aspects of the business without giving the technical-founder time to speak. This shows the inability to work together and respect each other’s talents. Founders should be focused on allowing each other to speak when the topic is their expertise. VCs want founding teams that work together smoothly with high levels of mutual respect since this lowers the chances of fighting and a potential founder divorce down the line.
4. Unable to Answer Important Questions. Before raising money, founders should have a clear picture of what is happening within the company, the plan, and the uses of funds. Founders who are unsure about basic details (such as costs, customer type, and sales cycles) show a red flag of being too early or unfit to grow their operation at the VC scale. VC funding expects startups to grow at hyper-speed and requires founders to be fully immersed in every aspect of the startup to ensure success.
5. Misleading Metrics. Founders violate this red flag more than almost any other. The incentive to create incredible metrics is high since it will help convince the VC to invest. This includes changing definitions of terms (for example “active account” can mean opened regularly or just never closed) or using numbers to inflate their growth (calling growth from 1 user to 20 users a 20x growth). While it may technically be true it is deceitful, and VCs will usually shy away from any investment when they discover founders engaging in this practice. It highlights the founder’s willingness to deceive and forces the VC to question everything else the founder has said. It also foreshadows the founder’s ability to lie for business and clients which opens a large liability risk. It is much better to portray honest metrics that show the grit and determination of the founding team to grow – even if it is not hyperbolic. VCs know that most startups – even successful ones – don’t grow at consistently high rates and have hiccups along the road. 

Next week, we will continue the list of red flags in other areas.

If you are looking for help crafting a top-quality pitch, book a coaching session here with Jason Kirby.

Fundraising Demystified Episode #17 is Live!

In this new episode of the #FundraisingDemystified podcast, we interview Mustafa Al-Adhami, co-founder of Aztek Diagnostics. He shares his journey from being a refugee ten years ago to developing a new diagnostic device called “Jiddu” that identifies bacterial infections in urine and antibiotic sensitivity in one hour.

We delve into the challenges faced in the healthcare industry and the hurdles that he encountered in raising capital. Here are three major takeaways that I think you'll find incredibly valuable:

1. Embrace Mistakes and Learn from Them: He reminded us that making mistakes is a natural part of growth and success. He candidly shared how he was called "stupid" multiple times, but he didn't let that deter him. Instead, he used those moments as opportunities to learn and grow. So, let's remember to be curious, ask questions, and embrace uncomfortable situations to accelerate our own personal and professional development!
2. Don't Be Afraid to Ask: He emphasized the importance of asking for what you want. Whether you're an immigrant or not, this lesson applies to all aspects of life. If you don't ask, you'll never know what opportunities may come your way. So, let's step out of our comfort zones and start asking for what we truly desire!
3. Overcoming Rejection: Mustafa's story of facing rejection and embarrassing moments during meetings resonated deeply with me. He encouraged us to see rejection as a stepping stone to success. Sure, it may sting at first, but it doesn't define us. Instead, it's an opportunity to learn, improve, and move forward. So, let's put ourselves out there, embrace the practice runs, and seize every opportunity that comes our way! Listen Here

Jason has already roasted 20+ decks during this weekly event. We have received incredible feedback from founders who had their decks roasted or just came to watch.
Click the link below to submit your deck to receive feedback on how a VC would look at it. This is a RARE opportunity, so don't miss your chance! RSVP Here

What the Experts Have to Say

Red Flag List for VC Deals

Great short list of important red flags that will scare VCs with a good explanation behind each one. Read More

Red Flags and Early Mistakes

Not every red flag is maliciously done - many are also mistakes. Here is a list of mistakes that can turn into red flags.  Read More

5 red flags to watch out for when working with startups

Red flags are not just important for VCs, but also for people partnering with startups and relying on products and services. There are red flags to look for before relying on a startup. Read More

If you're ready to raise capital, accelerate your fundraising process by upgrading to Premium. All premium clients receive a complementary consulting session with Jason Kirby, Managing Partner at Thunder. Upgrade Now

Let's stay in touch:

Written by Jason Kirby - https://www.linkedin.com/in/jasonrkirby
Subscribe to our weekly newsletter for market and industry news and tips when it comes to raising capital and growing your business - https://join.thunder.vc
Seeking to raise capital? Get your list of target VCs by creating a free profile here - https://web.thunder.vc
Looking to raise debt? Explore tailored debt options for free by completing a profile at https://debt.thunder.vc