Active investors sift through dozens of deals a week, and some hundreds a month. In order to find the gold, they need to quickly weed out the junk. The junk usually involves startups with any one of three red flags that deems the deal a “pass.”
Unfortunately startup founders are rarely aware of these flags, or choose to ignore them. Regardless of whether you believe these flags apply to your startup or not, you can be sure that investors will be far more critical of your progress and your deal traction.
Traction is your ability to demonstrate you can move the ball forward, with or without funding. Traction comes from signing up early customers, generating some revenue, or demonstrating high user growth.
Startups often complain that they can’t get traction without capital. Remember that you’re competing against other startups for capital, and those that get funded will likely be those that figured out how to do something with nothing.
No Lead Investor
The hardest part about investing in startups is doing the diligence to find out whether a startup has merit. All investors have exactly the same amount of time, no matter how much money they have to invest, so this is a precious commodity.
One way investors will quickly size up your startup is to determine if you have secured a lead investor. A lead investor in your deal is simply the first person who has committed to investing. Having a lead investor can make all the difference. Not having a lead investor means no one has given you a stamp of approval. That stamp looks like a check that they’re willing to write on your behalf.
Potential investors know that someone else has come on board and written you a check, it’s likely that they have done some level of diligence before they parted with their money. That at least gives the investor a simple indication that your deal has merit over another deal that has no lead investor.
Fundraising has a certain cadence to it. Good deals that are attractive to investors often garner interest quickly, and therefore generate momentum amongst investors who clamor to invest. Bad deals often wallow in fundraising limbo forever.
Most positive fundraising cycles last about 90 days or less. If you’re still fundraising after 9 months, investors will be wary, and assume there is a reason your startup hasn’t generated more interest.
The moment you signal to a group of investors in your city that you are actively fundraising, the clock is ticking. Investors talk, and they will find out if your startup has stalled. The lack of forward momentum is a huge red flag.
Perception is Reality
Managing the perception of your startup amongst investors is a full time job, and it helps to take it seriously. If you’re not actively promoting your progress and making that progress visible, investors aren’t going to find out on their own.
Even if you can’t avoid all of these red flags, it is necessary that you recognize if one or more of these red flags could apply to your startup. It is imperative when presenting your deal that you be ready to explain why you are sure of future progress.
Fundraising isn’t just about your deal: it’s about the perception of your deal. So make that perception a priority.
This post originally appeared on the Forbes blog.
Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.
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