3 Common Red Flags Ventures Funds Look For In Startups

March 16, 2022

Many factors go into a successful bid for raising capital, and you do not want your hard work to go to waste. That said, it is imperative to lay the foundation for your company to receive the best possible response. Fortunately, there is a wealth of information available to help you avoid some common pitfalls when going through this process, and below are listed some things to steer clear of. 

A Weak Marketing Plan

An investor or bank needs to focus on obtaining a return for the monies they are entrusting to your endeavor. Your backers may not be fully aware of the niche in which you do business, and as such, they will be leery of any enterprise that lacks a solid structure from which they seek to obtain a customer base.

Put simply, your clients are the lifeblood of your firm, and you need to have a strong handle on the methods whereby you intend to reach them. It may take time and research, but you will need to build a solid framework to assuage any doubts your potential investor or banker may have.  

Your proposal should contain the specific ways in which you intend to advertise to your base, including any partnerships you may have to help you toward this end. It is perfectly acceptable to require assistance when preparing these necessary documents, as investors are going to carefully scrutinize your offering to ensure that you will be able to scale your business. 

Lack of Forward Momentum

When there is no movement in your operation, the institutions or venture capitalists you are hoping to partner with are going to have some serious concerns. Your prospective investor is going to want to see that your product or service has already made a splash in the market. As the saying goes, it is much easier to steer a moving vehicle than it is to do so with a parked car. 

You’ll want to demonstrate measurable growth that shows a steady progression over months or even years, and you will need to find workarounds to any problems that you may encounter. It is vital to familiarize yourself with the factors that govern the market to establish your startup as one that is positing a solution to the pain points facing your target audience. 

When investors do not see a pattern of overcoming obstacles or of becoming more adept at finding and retaining clientele, it will be viewed as a red flag, potentially putting the brakes on your attempts to obtain funding. Positive testimonials, however, and good press can generate a buzz that bodes well for your brand. 

Excessive Burn Rates

If the rate at which you are required to expend financial resources is greater than the revenue that you bring in, investors and banks may look unfavorably upon your ability to succeed. Although it is normal to have overhead expenses, especially in the beginning, this must fall within certain parameters and have a reasonably good chance of being recouped. 

Specifically, your burn rate is calculated as the amount of time it would take for your company to run out of money based on how much you spend each month. This figure will also take into account whatever monies you are currently bringing in. When paired with a balance sheet that shows very little revenue each month, this can spell disaster. 

You’ll need to consider your payroll allocations and your own salary, as you’ll likely need funds to do research to determine your product’s fit in the marketplace. In addition, your overhead must be carefully examined to see if it is too high, and your profit margins need to be sufficient to keep your company in the black. 

AI Capital Advisors can help provide you with the valuable insights you’ll need when moving forward with your presentation, so you can achieve a higher valuation. We have years of valuable experience advising clients, and we look forward to working with you. Contact us for more information today. 

Photo Courtesy of Pexels

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