13 Startup Red Flags to Avoid
The reality is that most startups fail. In the last few years, I've consulted or mentored more than 500 startups. Here is a summary of the recurring problems I have seen in the flawed startups to avoid to maximize your odds of success:
A small or unscalable idea. Investors tend to have bias against ideas that throw out the largest nets possible in terms of potential customers. They would much rather back the next Google, whose product appeals to everyone and anyone, than a small niche business that only appeals to a very narrow market.
Wrong market positioning. Often times, entrepreneurs launch businesses they think are good ideas, but they never took the time to properly research the market. As an example, investors don’t want to back the 10th startup in a space, they would much rather back one of the first.
No go-to-market-strategy. Entrepreneurs are typically so focused on building their product, that they don’t think far enough ahead to their go-to-market strategy, and how that will help them to achieve a proof-of-concept to attract growth capital.
No focus. It is hard enough to launch one business, yet alone try to launch multiple businesses at the same time. Don’t be a jack-of-all-trades -- you'll end up being a master-of-none.
Know when to cut losses. If you are trying to paddle upstream, no matter how hard you paddle, the current is going to take you backwards. Entrepreneurs need to know when a pivot is required, while there is still enough capital in the bank and enough time to implement the changes.
No passion or persistence. If an entrepreneur does not exude passion about their product, they will never love their startup enough to get through the good times and the bad. You need to have a persistent mindset that regardless what hurdles get thrown your way, you are going to figure out a way through them.
Wrong or incomplete leadership. Never try to put a Fortune 500 team inside a startup, because they don’t typically think like startups. Investors do not want to back a person, they want to back a complete team -- in case you get hit by a bus.
An unmotivated team. The management team needs to have the same incentives as the founder, and putting 15 to 20 percent of the company into the hands of your employees will be a lot more motivating and loyalty instilling.
No mentors or advisors. Entrepreneurs should not be “lone wolves.” They need to understand they are not in this battle themselves. Many cities have established startup ecosystems for them to tap into for mentors.
No revenue model. OK, I understand many startups may not have a revenue model day one. But there better be a clearly communicated revenue plan for down the road. That revenue plan needs to be material enough, based on credible assumptions, to make it enticing for an investor to get excited and to justify your current valuation.
Less capital than needed. First of all, make sure you are raising enough money out of the gate. That means raising enough to build your product and to achieve your proof of concept. Preferably, that amount is large enough to at least carry you for the next 12 to 18 months. Whatever capital you think you will need, double it for a cushion, as things always go wrong.
No long-term roadmap to ROI. Whether you are investing in your own business, or raising capital from outside investors, you need a clear roadmap to at least a 10-time return on your invested capital.
Bad luck or timing. Sometimes, businesses fail for no fault of their own (e.g., due to economy). During bad times, it is often best to go into “hibernation,” waiting for conditions to improve so you can live to fight another day.
For more on this topic, check out my Definitive Checklist for Startup Success.
Related: 9 Reasons Why Most Startups Fail