Every new business has risks, but these red flags for Investors could send them running for the hillsEdit date and time
When it comes to investing, I’ve been on both sides of the table. I’ve spent years in businesses at all stages of raising capital, and I’ve also invested in other people’s companies. As a result, I’ve learned firsthand what to do—and what not to do—when presenting to an investor including red flags for investors.
While every investor is different and, yes, each has his or her own risk tolerance, there are a few red flags that will likely convince even the biggest risk takers to pass on the opportunity.
Here Are The Red Flags For Investors And How to Avoid Them:
High Failure Rate
Some industries have significantly higher failure rates than others. Restaurants and retail stores are two good examples. While that certainly does not mean you will not succeed, you will need to have a very clear plan. If among the sea of people pitching a restaurant or retail store, your plan will need to reveal how your company will be different than the thousands of others. Show an investor you’ve done your research and have a plan A, B, and C.
Dependence on Legal or Government Regulation
Industries that tend to be more litigious than others or subject to heavy legal regulation may make investors hesitate. If your product requires long government approvals or a bidding process, there could be additional cause for concern because of the potential drain on cash.
Investing in such businesses is not for everyone. Try to identify investors with experience working in such an industry, as investors specializing in fast-launching businesses will likely be turned off by such a long process.
Key Operations in Different Places
If your company is based in one place, such as the United States, but your key operations are in a different country, that can be a cause for concern. Separation can make managing a fast-moving business even more complex. It’s much easier to become disorganized and for tasks to fall through the cracks when you operate from multiple locations separated by time zones.
Small Returns for Investors
Your potential investors may believe in the product, the market, that you have the right team to execute, and that everything is in place. But your business still may not meet their investment criteria if the anticipated returns are too low. Or, if they view it as a lifestyle business and think you will want to stay with it forever, leaving them with no chance at a big exit. Chances are, though, what you’re offering will be perfect for someone else. Keep trying.
Investors come in many shapes and sizes. When one investor turns you down, look for another that may be a better fit for your business. Keep in mind that every new business has its risks. It’s not about eliminating the risks; it’s about finding someone that believes the potential for large returns outweighs your potential red flags for investors.
Heavily Regulated Industries
Industries subject to heavy regulatory scrutiny may give investors cause for concern. If your product requires long government approvals or a bidding process, investors might worry about a potential drain on cash. Investing in heavily regulated industries is not for everyone. Try to identify investors with experience working in these industries, as investors used to little-to-no regulation will likely be turned off by these industries.
Investors come in many shapes and sizes. When one says no, look for another that will be a better fit. Every new business has its risks, but it’s not about eliminating those risks – that’s impossible. It’s about finding an investor that sees past any potential red flags, and believes in the potential for large returns.
High Failure Rate
Some industries have higher failure rates than others – restaurants and retailers, to name a few. While entering into an industry with high failure rates certainly does not guarantee failure, you will present a very clear plan for success. Your plan will need to detail exactly how your company plans to succeed, and differentiate itself from the thousands of others in your chosen industry. Show an investor you’ve done your homework, and you’re more likely to close on the deal.