Red Flags in the Business Itself

Last week, we focused on the red flags VCs look for in startups during the pitch. However, a well-coordinated pitch can be taught. VCs will look closely at many other elements to determine the investment viability before sending you a check. The business itself is the heart of the pitch, and they will want to know that what you are building is valuable and can grow to a scale that will return their fund. Here are some red flags VCs may look for in your business:

1. No Paying Customers. Counting people who take free samples does not count as a true customer base. There is a big difference between having someone try the product for free and having them pay to use it consistently. VCs will want to know what percentage of non-paying users will be converted to paying users (rarely 100%). Even if the number of free users is skyrocketing, it does not mean any will want to pay for the product. Usually, VCs will consider a startup without any paying users to be too early; however, there are exceptions for incredible startups solving big problems in new markets.
2. Little Traction. This usually signals that the founder has not found a product-market fit yet, and it becomes a red flag when the founder can’t create momentum over a long time. It will signal to the VC that this product has no demand in the market or that the founder is not able to guide the company into a place where there is product-market fit. Usually, this happens when founders are too focused on their original idea and unable to adjust based on what the market asks for. A key feature of this is that founders will use irrelevant metrics to validate their startups, such as newsletter subscribers or social media followers.
3. Customer Churn and Concentration. To be successful, customer churn must stay at a healthy level based on your market and business model. Companies that spend lots of money on marketing for new clients without retaining old clients and are left with slim margins are usually unstable in the long run. Additionally, companies where the majority of income is from a handful of clients have high levels of risk. They will both scare a VC due to the higher-risk nature of the business model.
4. Previous Attempts. Has this idea been attempted before, and what is new? VC want will assume that if you are copying a previously attempted company, then your startup will likely end the same way – unless there is a significant difference. If the previous company closed due to the lack of demand, then the assumption is that the demand is not there without proof that the consumer body has changed. It is very important to communicate these changes in your consumer base and the business model that will make your version a success. However, it is important to remember that VCs may still shy away since investing in a company that ends up failing with a previous example case is very harmful to their reputation. 
5. Ease to Scale. Not every startup is meant for venture funding. Most are great startups that can generate great returns for the founder without VCs. VCs are looking specifically for highly scalable startups with incredibly large markets with little competition. If a startup says you are not venture-backable, it does NOT mean you have a bad company, just that it does not fit the exact box they want to fill. For example, service-driven companies that require people to help customers manually are very difficult business models to grow quickly – Even if they can become incredibly successful over time. Additionally, companies that service niche markets can be very valuable, but not at the scale the VC is pursuing. Therefore, it is important to know if your startup fits the VC box before looking for VC money and wasting your time being rejected. 

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

Fundraising Demystified Episode #18 is Live!

In this #FundraisingDemystified episode, Lloyed Lobo, co-founder of Boast.ai, shares their journey of building software, starting with two previous failures before realizing the potential in automating the broken application process for government incentives. With the use of stitching Zapier and Zoho Creator, they were able to achieve $10 million in revenue and build a large community of tech CEOs. We also delve into the concept of growth equity and the challenges faced by founders in the current VC landscape.

Here are 3 key takeaways from this episode:

1. Focus on customer success: Building software isn't just about creating a product, it's about ensuring your customers' success. By understanding their needs and delivering the outcomes they desire, you not only build strong relationships but also set yourself up for long-term growth.
2. Automate for control and efficiency: Automating processes over time can give you maximum control over your operations while minimizing dilution.
3. Harness the power of community: Building a community around your niche audience can create a movement and have a significant impact. Lloyed's journey involved hosting meetups, bringing in successful founders and CEOs to share their experiences, and providing growth knowledge to tech company CEOs. Community-building can be a powerful engine for growth and support. Listen Here

He Also Just Launched a New Book for Founders

From Grassroots to Greatness will help you master 13 game-changing rules to skyrocket your business with Community Led Growth, featuring tactical advice from iconic brands like Apple, Atlassian, Harley-Davidson, HubSpot, and more. Grab it for just $0.99! Find his book 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

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Written by Jason Kirby - https://www.linkedin.com/in/jasonrkirby
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