If you’re an ambitious founder approaching a round of funding, you’ve probably got a lot on your mind. How will you find the right investors? How much are you willing to compromise? Will you reject funding if the investor isn’t right for you?
When you’re in your early funding rounds, you should be careful not to take the first offer that you get without fully understanding all the terms attached. When you’ve got an enticing offer on the table, it’s hard to walk away, especially when you need the funding. But as a founder you need to make good decisions for your company- which are sometimes hard decisions. These are the investor red flags to look out for if you’re wondering whether or not to reject funding.
If your potential investors are simply not aligned with your vision for your company, you may regret accepting funding from them. It is important to fully understand their terms and if there are any fundamental points of divergence that you are not willing to compromise on. Critical rounds of funding such as a Series A raise require careful attention to detail because investors are gaining a large proportion of equity in your company. It’s crucial that you consider the future impact that every single investment will have on your business. You don’t want an investor who is not aligned with your vision to have important decision-making power.
In return for their investment, investors will usually expect a degree of control over the direction of your company. This is normal and will usually have to be accepted to a certain extent. However, there are limits. If an investor is asking for too much control over your company and a final say on all fundamental business decisions, you might want to consider looking elsewhere for funding.
Nobody likes a bully, but the investor world has them too. The path to Series A funding is long, and you will spend a lot of time meeting with your potential investors and getting to know them. If you become aware of any strong-arming behavior, take it as a red flag. If an investor is using forceful or coercive tactics to get you to agree to their funding terms, or making insults or threats about you or your company, pull out immediately.
It is important to ask your investors what they expect from your company. It is good if an investor has a lot of faith in you and expects you to succeed, but there are limits. If your investors have unrealistic expectations about where your company is headed and what you can deliver, then accepting money from them now sets you up to disappoint those investors in the future. Communicate clearly with your investors and make sure neither party goes into business with unrealistic expectations.
You might think that since an investor is willing to put substantial amounts of capital into your company, they are personally invested in your success. This is not always the case. In the age of quick cash and hungry SPACs, there are plenty of disengaged investors out there who just need somewhere to park their money. Make sure your potential investors have done their research on you and seem genuinely interested in what you have to offer.
Money isn’t everything. Even if an investor is putting enough cash on the table to fund your growth stage several times over, you should still make sure they have the credentials to back up their vision for your business. If your investor wishes to have a say in how you grow your business but hasn’t have the right business experience or education, their offer might not truly add value to your company.
Finally, let’s not forget about the most important factor: you. If you have received a funding offer that just doesn’t feel right, it can be worth listening to your gut. Whenever something feels wrong, it usually is. If your gut is telling you to walk away, you should at least take some time to sleep on your funding offer and think long and hard about whether you want to accept money from an investor that is giving you bad signals. Your company has gotten this far based on your instincts, so don’t ignore them.
Getting the right funding to grow your startup isn’t just about pounds, euros, and dollars. It is also about the quality of the money and the people attached to it. Remember these red flags when you meet with investors and make sure you’ve got the right support and expert advice to help you make decisions.