You’ve got a superb idea, a good prototype, a high and terrific market opportunity, and maybe even some funding already. But you may still lose potential investors that have nothing to do with your startup and everything to do with you.
Here are five of the non-negotiable hot buttons that will make potential investors turn down an investment, no matter how good the financial prospects appear.
1. You Knowingly Mislead People.
If you’re not trustworthy, it’s over. It can be as simple as pretending to know answers when you don’t, implying that you have investors or contracts that aren’t real, or you give half answers to questions that conveniently leave out non-flattering but significant information.
Note that investors may not dump you simply for painting the rosiest, plausible picture and showing hockey stick revenue numbers that seem ridiculously ambitious. Investors expect some amount of hype, and we can put up with that. But you have to be honest.
Worst is a coverup: An entrepreneur/startup presenting to an angel group was discussing his record as a “successful repeat entrepreneur” but didn’t give particulars other than “the last company he founded went IPO.”
When upon interrogation he told us the name of that company, it only took a few minutes on Google to discover that a) the company was now defunct, having been in the middle of a penny-stock trading scam, with multiple lawsuits still ongoing; and b) that the founder/CEO had a different name than the man presenting. He responded to the first fact that he had been the victim of those scams, and to the second that he had decided to change his name. Needless to say, no checks were written to that company. His new company actually had acquired rights to some interesting technology, but the integrity question made it a total no-brainer pass.
2. You Haven’t Done Your Homework.
Unfortunately, it’s not new that an angel will have deep knowledge of the sector you are in, so they are going to ask questions, and lots of them. But imagine what an investor’s reaction will be if you don’t know the answers to basic questions about your own markets, who your competitors are, or worse, haven’t even considered an obvious question.
The good news is that this is easily correctible. Do your homework before you pitch angels. When you practice your pitch dozens of times before mentors and other entrepreneurs, chances are you will have had a chance to think about and respond to almost all of the obvious questions. But until you get to that point, don’t burn your bridges by pitching to investors too early. Work on your business model and your pitch until they are shining jewels.
3. Your Projected Expenses are Unreasonable.
As mentioned above, investors don’t really mind—and have come to expect—entrepreneurs showing revenue projections that go straight to the moon. However, investors will scrutinize projected expenses closely. If they are unreasonably low—for example, having a model that depends on external sales without any meaningful salaries or commissions, not budgeting for legal expenses, etc.—that marks you as a greenhorn that needs to go back to school.
Worse than the greenhorn is the greedy entrepreneur who is looking to raise money to immediately go back into his or her pocket. This is especially true when the entrepreneur has been on the beach or an “independent consultant” for a period of time. It’s no sin to need or get a paycheck, but if you are looking to angels to fund your six-figure package, that’s a sign of greed.
A me-first priority will manifest itself in losing employees, creating lousy margins, and other bad scenarios. The CEO needs to take the lead in all aspects—including demonstrating hunger, commitment, and sacrifice. If you’re focused on the short-term rewards, there won’t be any long-term rewards around for us investors.
4. You Don’t Follow Through.
This is another important point to note. This won’t be evident at the first meeting, but in the follow-up. Investors are correct in saying that diligence can be quick, given that startups will change directions. I too believe due diligence needn’t take more than a week or two, but I still think that in most cases there needs to be several interactions between the entrepreneur and potential investors. Why? With the biggest risk for startups being execution risk, investors need to assess whether you will do what you say you’ll do.
If you call them when you say you will, if you follow-up on their questions quickly and efficiently, those are all positive indicators that you are accountable and will deliver on promises. There’s no shame in putting a reasonable but later date on some deliverables because you are busy. Investors hope and want you to be busy, and maybe even you’ll earn bonus points if you turn something around earlier than promised.
5. You’re Dogmatic.
It’s easy to say no to someone who is a jerk. But assuming that you’re not arrogant, full of yourself, and “getting high on your own supply”, you can still turn Investors off by not considering alternative viewpoints. When you answer questions before finish asking them, when you don’t take the time to really listen to what people are talking about, when you assume you know every answer cold even before it’s clear where a comment is coming from, that’s another telltale sign of too much hubris and not enough coachability.
For a good entrepreneur, it shouldn’t be hard to avoid these potholes: you do your homework, you don’t lie, you follow through, you’re not shortsightedly greedy, and you’re open to hearing what others think about your strategy and prospects. Miss any of those, and you become a bad bet—low odds that can’t be papered over by any amount of experience, social proof, traction, or the other building blocks that attract an angel’s attention. When our due diligence shows that you’re not going to let us down in those five areas—now you’re a whole lot closer to being bankable.
What do you think? What else should entrepreneurs keep in mind to keep angels from walking from their deal?