5 Red Flags of Startups: Wasabi Ventures Part 6/6

Rasel Rana
February 27, 2014
5 Red Flags of Startups: Wasabi Ventures Part 6/6

I hope all of you enjoyed the series through the Wasabi Ventures Academy thus far. Personally, I found it a great refreshing tool in the startup world and I wanted to make sure what I had learned can be a resource for all of you who are treading on the path of entrepreneurship. I also wanted to go ahead and thank all of you for the personal texts, emails, and messages I’ve gotten as feedback for my posts. At the end of the day, I write for you guys, so please feel free to contact me if there’s a topic for a post you’d like me to discuss or if you just would like to chat.

Although this marks the end of the six-part series on venture capital and the startup world, I will continue to post almost daily on similar topics, so please come back to keep up to date.
With that being said, let’s turn our attention over to our last but certainly not least segment: The 5 Red Flags of Startups

Often times throughout our daily lives, we encounter entrepreneurs who are working on the next big thing. As an investor, you probably meet many of these ambitious characters, but you struggle when sorting through them and their startups.

Venture Capitalists invest in one deal for every hundred they see. With that much deal flow, how can one streamline the process so that you’re left with more viable candidates for your investment?

One quick and easy way to do it is to quickly notice the five red flags. This is not only meant to be a resource for investors but also for you entrepreneurs – thus enabling you to be more aware of how investors would perceive you and your startup.
1) Founder(s) always feels the need to be the smartest person in the room
Smart People need to be Humble:

  • This means they usually have a hard time listening to customers
  • They tend to be poor managers
  • They think the whole world is like them
  • They think that being smart is all that matters
  • They always think that they have to have the answers to all questions

As a startup founder, you will make frequent pivots on your journey. You will be wrong. Occasionally, you will make mistakes and make poor decisions. The founder needs to be cognizant of these elements, be agile and enduring in these difficult situations, and know when to seek help. It’s crucial to have an open mind and be aware of all possibilities. 
2) Target audience/Customers are other startups
Startups Make Bad Customers:

  • They never have a lot of money
  • They tend to think they can build anything themselves
  • There aren’t that many of them
  • They tend to disappear

This is all pretty self-explanatory.
3) You, as the investor, are not passionate about the startup.
Why it is an issue:

  • If you don’t get a great feeling, it isn’t worth caring about and definitely not invested in
  • The people involved weren’t inspirational
  • You don’t have a personal vested interest

If you can’t see yourself excited about the startup enough to the point where you’d bring it up in conversation with buddies during happy hour – cross it off the list.
4) Measurable expenses for Lawyers, Accountants, Real Estate
There is no ROI here

  • This shows that a startup is focused on the wrong things
  • It can’t usually be zero, but it needs to be close to zero
  • In the early stage, it needs to cost less than lunch per month
  • None of these make a company more valuable; they are just necessary evils

Startups should be focused on product development, gaining customers, and growing the business – and their costs should reflect that. It just does not make sense to see a projected income statement for a startup with immense costs from legal, accounting, and rent expenses. 
Would the Founder Pay for this?
Are the founders passionate?

  • They aren’t passionate about the problem.
  • They don’t understand the problem.
  • Have zero credibility as an authority in the space

The founder will be putting in tons of hours a week building this startup. They are the ones who will be bringing this idea to life to solve the pain point that they had resonated with. If they show any sign of these bullets, they are probably not worth the look. 

Please keep in mind that none of these flags are 100% disqualifiers, but any instance of one of them should make you cringe as a co-founder, investor, or interested party. And the beauty is these warning signs are universal and not dependent on any vertical, geography, or technology.
With that, we conclude the 6 part series from the Wasabi Ventures Academy.

I thank you all for your support and appreciate all the feedback. Please do come back as I continue to write in the startup/entrepreneurship vertical along with some of my own personal endeavors.
I also wanted to thank Chris YehTK Kuegler, and Wasabi Ventures for taking the time to make this information accessible and helping to teach their analysts and associates about the startup world. We need more people like you to help breed the creative minds and entrepreneurs of tomorrow.
Keep hustling, my friends.

This article was originally written by Rayyan I. Patwari, Founder of the Industrial Decarbonization Fund at 8090 Partners.

WRITTEN BY: Rasel Rana

For further clarifications, contact here: [email protected]

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