Turning Entrepreneurship Into a Team Venture: Kirsten Moorefield and Cloverleaf
Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
1. A Lack of Preparation
A dismissive attitude towards reviewing vital documents, such as an agreement proposal or strategic plans, is a red flag. After the initial due diligence, I like to have a one-on-one meeting scheduled with the investor to discuss the investment in depth, its financials, its motivation, and our company philosophy. Then I can be certain we’re a good fit and clarify any misunderstandings before moving forward.
2. A Weak Network
When you partner up with an investor, you’re not just relying on their guidance and expertise. In many cases, you are also counting on having some level of access to their network that will allow you to bring a superior product to the fore. If your investor is all money and no network, that’s a huge red flag. It means to me that we both won’t have a clue what do with his/her money.
3. Wanting to Change Who You Are
It constantly amazes me how many people will take a look an already successful business that is looking to grow and tell them to change the core of who they are or what their brand is. It’s a big red flag if the investor doesn’t understand and appreciate what is it that you already produce versus throwing out a million ways you could be a different company.
4. Being Overly Emotional
Business can be stressful. When you see someone completely lose it — get emotional, upset, disturbed, or angry — during negotiations, you know that person does not have the maturity and professionalism you want in an investor. We’ve found people we thought were a good fit, but when we got into negotiations, they acted out. That’s when we knew we needed to get them out.
5. A Lack of Niche-Experience
If you’ve never worked in/have no experience with my industry and niche, I can’t be sure of what your motivations are. What I am pretty sure of though, is that you didn’t pick us out of a fundamental understanding of what we do. Assuming that, I will be uncomfortable with almost any level of influence you want to exert over our operations.
6. Focusing Too Heavily on the Exit
When the first question out of their mouth is about the exit, I know it’s time to run for the hills. The exit is the product of many long hours, tough decisions and wrong turns. If the investor isn’t interested in being there for the process, they’re going to grow impatient and be a drain on your most valuable resource — your time!
7. Not Understanding the Stage You’re In
Every stage of growth needs a different kind of investor. Early on, look for an investor who thinks like a business partner. As you grow, ideal investors are on the same page as you are in terms of target customers, model for the business, and eventually look to invest based on your financials. At each stage, the red flag is different. Overall the biggest red flag is a mismatch in expectations.
8. Asking About Becoming a Board Member Too Soon
All money is not the same. Investors can make or break your business. One red flag you definitely need to be aware of is the investor asking about being a board member early in your talks. This is a reasonable question, but should come later in the process. If you’re asked this at your first meeting, you are probably dealing with someone who is going to try to micromanage you and your team.
9. Wanting You to Fill a Quota
ZinePak is self-funded, but I’m constantly shocked by how many would-be investors approach me and say things like, “We’re looking for more women-led companies in our portfolio,” or “I like that you guys aren’t tech-first. I need five non-tech companies this year.” If/when we take on investors, it will be because they believe in our company and mission — not because they want to check a box off for their portfolio.
10. Having Unrealistic Expectations
It’s okay to take on an investor with limited investment or industry experience. But be careful when it comes to taking one on with unrealistic expectations. For example, becoming an overnight sensation, or wondering why Warren Buffett hasn’t asked how many zeros your acquisition check should contain. Make sure they either understand the investment landscape or can be realistic about it. .
11. Not Respecting Your Time
Investors are busy. The fastest way to get on their bad side is to waste their time. The same should be true for you. I’ve found that the best investors respect my time as much as their own. If they don’t during the ‘courting’ process, you better believe they won’t when they are on your board (or have rights).
12. Dwelling on Mistakes
Red flags depend on what you are looking for. Are you looking for additional resources or just money? We’re looking for investors who approach things as opportunities for improvement rather than dwelling on mistakes. At the end of the day, if you can’t see yourself having a beer with them, then I don’t suggest doing business with them.
13. Wanting Too Much Control
When I’m looking for investors, I want someone who believes in my company and who also trusts me to continue to make the major decisions. If I want to relinquish control, I’ll just sell the business. But it’s a red flag if an investor expects his investment to give him the right to start making all the decisions. So I prefer investors who believe in my vision and doesn’t want too much influence.
14. Poor References
Most companies go through at least one rough period. You need an investor that will support you through the good times, but even more so during the bad times. The best way to find out if an investor is supportive during the bad times is to talk with founders who have raised money from the investor you’re speaking with.