We all have them: red flags. It could be a potential mate's taste in music, a microaggression during a job interview, a salesman who's trying too hard or being left on "read."
Twitter has been flooded with examples of red flags over the past week or so. Even the queen of country, Dolly Parton, jumped into the conversation tweeting, "When her beauty is beyond compare with flaming locks of auburn hair" — a reference to lyrics from her famous single “Jolene.”
The use of the red flag emoji jumped 455% last week with 1.5 million tweets containing one on a single day, according to Cnet.
So with red flags everywhere, the Business Times asked several Bay Area investors what their biggest red flags were when it comes to looking for startups to back. Here's what they said.
- Being disorganized — Founders should be responsive to requests for more information, says Shruti Gandhi, the founder and managing partner at Array Ventures in San Francisco. It "shows if they are organized and in the mindset to do a deal vs. spin cycles," Gandhi said. "At the pre-seed stage, it’s really just about making rapid progress."
- Misrepresenting the company or withholding critical data — If you're BS'ing your way through a meeting, you're probably not ready and investors can tell. Berkeley SkyDeck's Executive Director Caroline Winnett wants to see the actual status of a product or customer development. Otherwise, it might become "clear that they misrepresented their business." Swati Chaturvedi, the co-founder of San Francisco-based angel investing platform Propel(x), wants to see concrete data. "Propel(x) focuses on deep technology startups. For us, scientific data is very important. If a founder refuses to share their data, it is a big red flag," Chaturvedi said.
- Trying to skip steps — There's no way around due diligence and it's a red flag if founders "try to FOMO you into moving quickly," said Anurag Chandra, a senior partner at Fort Ross Ventures which has offices in Menlo Park and Tel Aviv. "Not only is it bad for arriving at a sound investment decision, it’s an indication of how they do business with customers and partners (i.e., not invested in building long term relationships)."
- Being too focused on "vanity metrics" or "runway" instead of strategy — You need a solid business plan. "Founders who are focused only on vanity metrics (growth rate and valuation) and not attuned to developing sound business models" are a red flag, Chandra said. Similarly, don't expect anyone to just throw money at you without any achievable milestones, Chaturvedi said. "When a founder is raising money for 'runway', rather than achieving key milestones, that is a red flag. It is an indicator that they have not thought through their growth strategy / tactics."
- Not doing their research — No, your addressable market is not in the trillions. "Unreasonable market size estimates" are a red flag, Chaturvedi said. "If a founder is estimating their market in the trillions of dollars, they have either not done the research to identify and zero-in on their segment or they are just delusional."
- Not having a clear leader/CEO or not being open to feedback — Egalitarianism is noble but somebody needs to take charge. "There needs to be agreement on who is acting as CEO," Winnett said, and "everyone needs to be aligned on that." If you're not open to advice from experts, that's also red flag, Winnett said. "We can't help those companies."
And without further ado… some tweets about startup red flags from around the country.
