If you are an early-stage startup, you’re probably wondering about the red flags that investors look out for. Let me share the most common ones, so you can address them proactively.
Advisors. Do you have advisors on your pitch deck? That’s one of the biggest red flags. I wrote a blog post dedicated to this topic, explaining why investors dislike them. In summary, it’s an unnecessary cost, and they’ll question your ability to do business. Advisors open up Pandora’s box of doubts for investors. Why should they pay salaries or give equity to advisors who haven’t invested a dime in your startup? Investors will advise you themselves because their investment needs to grow. Advisors don’t have skin in the game. If you need to pay for advice, what else might you feel insecure about? Investors will question your drive and ability to deliver returns. Advisors don’t look good on your pitch deck. Investors will ask you to part ways with them, so why not do it now?
(Tech) Companies as co-founders. I’ve mostly seen this issue with tech companies, but it applies in other fields as well.
Here’s the scenario: Tech companies approach startups offering to build their product in exchange for equity. If structured right, it’s a great opportunity—but be careful. Often, these companies overcharge and ask for 20% upfront, then claim they’ll “invest” the remaining 80% in hours worked building the product. On top of that, they want someone from their company to become your co-founder and draw a salary. Essentially, you’re paying 20 times the price for 20% of a product and committing to paying salaries for the rest. Investors hate bad deals, and so should you. No co-founder is worth that kind of messy structure. Hire them as contractors and present them as the company building your product with a simple product development agreement. Investors value efficiency and clarity—respect that, and your pitch will shine.
The urgency for money. Wanting to raise funds quickly is one thing, but needing money because you’re personally running out of it is an entirely different story.
A Swiss investor once told me that the moment they sense pressure, they step back to understand the cause. Keep that in mind when approaching investors. You want to raise funds quickly for the growth of the business, not because you’re in financial trouble. Investors can sense desperation, and that’s a major red flag. I once worked with a founder from Finland who had a solid idea and potential. But after repeatedly asking for funding, his urgency became a red flag. I had to ask if he had debts or financial issues, and though he denied it, his insecurity was obvious to investors. Urgency without justification will push investors away.
High salaries. Investors are always looking at your burn rate—how much of their investment you’ll burn through each month. High founder salaries at early-stage startups with no revenue are a huge red flag. Investors don’t care about your mortgage. Imagine asking them for half a million dollars, knowing that 20% of it will go toward your personal salary! Investors are numbers-driven and won’t tolerate unnecessary expenses.
What will you do with the money? You need to provide a clear execution plan detailing how the funds will grow the business and generate returns for investors. Without a clear, logical plan, you’ll raise another major red flag. Investors want to see how their money will drive growth, not just keep the business afloat. In my next post, I’ll cover how to determine the amount you should raise and how to plan your goals accordingly. Make sure it makes sense to them, or they’ll walk away.
When investors see a red flag, they usually step back. They rarely have time to reject you directly—they simply move on to the next opportunity. They want to work with entrepreneurs who are serious about building successful businesses, not just looking for easy money to live off of. Investors scrutinize every number, every plan, and every pitch.
Take the time to review your business plan, pitch deck, and overall approach. Get rid of those red flags now. Look at your business from an investor’s perspective—be honest with yourself. Would you invest in your business?