When it comes to seeking funding, many companies turn to VCs or other outside investors instead of relying on family or bank loans. But investors want to make sure they’re getting the most for their money, and they’re looking for more than just a polished deck and a strong elevator pitch.
With increased competition for funding in Colorado, VCs have grown more discerning in selecting which companies they choose to support.
We talked to two local VCs about the red flags they look for in potential investments — here’s what they had to say.
1. Inability to demonstrate momentum
“Entrepreneurs need to recognize that an investment decision is rarely — if ever — made in one meeting,” said Brian Wallace, Managing Director of .
Instead, it’s a series of meetings that can take three, six or even nine months. Wallace categorized it as a courtship, where entrepreneurs have to get the investor excited about the product, team and market — but they also need to show progress and momentum in the business. Wallace said this is done by hitting sales projections, showing a building sales pipeline and indicating momentum in moving deals through that pipeline. “If an entrepreneur can't show momentum and effectively communicate this momentum, it is difficult to pick that deal over others,” he said.
2. Not knowing the market or competitors
“In almost every case, the statement ‘we have no competitors; is indicative of either a lack of understanding of the market, or worse, a small uninteresting market opportunity,” said Wallace.
Aaron Stachel, Principal at , agreed. “If I can spend five minutes online and find several competitors, you better know them and have a very convincing explanation of why you will be the winner in your market,” he said.
Stachel added founders who are outsiders to their company’s industry can raise a red flag — unless they can demonstrate an intimate knowledge of their market's pain points. “Even if your solution is better, you need to be solving a problem high enough up the priority list for the buyer to care, and that can be difficult to discern without relevant experience,” said Stachel.
3. Not knowing the financials or business model
If you’re asking someone for money, you should know exactly what you plan to do with it. “If an entrepreneur cannot demonstrate the detailed knowledge of and ability to navigate through the financial model, it does not build confidence that he or she will be able to scale the business,” said Wallace.
4. Poor communication skills
A lack of communication skills can limit the potential of great technology. “Founders that lack the ability to concisely lay out a compelling vision for their company will not only struggle to attract investors but they will struggle to attract the best employees and convince early customers to give them a shot,” said Stachel.
5. Negotiating the deal before selling the opportunity
“Do not start talking about deal terms before the investors have demonstrated an understanding and buy-in on the company,” said Wallace.
He said companies must have a clear plan to financing (e.g. how much money they need to raise, budgets, etc...), but shouldn’t start negotiating valuations before they even sell the opportunity.
6. Inability to build relationships
A few social skills go a long way — Wallace cited neglecting to follow up hurts momentum and confidence, making VCs less inclined to do the deal. Stachel added building relationships can be helpful before companies even seek out investment: “Having a network of mentors and peers that will provide candid feedback is a great way to identify these issues before pitching to investors,” he said.
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