The first red flag is when startups have not done their homework in terms of market research, customer discovery, and understanding competition.
The second warning sign is when the startup enterprises we are evaluating don’t have a coherent or fully committed team.
The third red flag is when the sector the startups are addressing is a shrinking or dying market- especially if the product is not scalable to other vertical or geographical markets. We, as Flat6Labs, usually shy away from investing in startups that their product is not scalable beyond a few thousand customers/users. In this early stage we prefer to invest in startups that have the potential to grow rapidly at some point in the future, if provided with the appropriate mentorship, support and capital.
The fourth set of issues we see in startup business plans are fatal hazards. Fatal hazards include stolen IP, local regulatory restrictions, complicated onshore/offshore ownership structures, and unfamiliar jurisdictions. If a startup is planning to use IP that is not licensed or open source to use, this is usually a huge red flag to us. We definitely prefer startups that either develop their own IP, or use an external party IP legally.