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3 Red Flags That Send VCs and Angel Investors Running

3 Red Flags That Send VCs and Angel Investors Running

Wednesday, May 25, 2016/Categories: business-tips

Hoping to attract investors to fund your startup? You might blow your chances if you make these three rookie mistakes.

1. Asking for Money Too Soon

Investors aren’t ATMs handing out free cash left and right. They’re people, and if you want to get them interested in you and your business, you’ll need to build a relationship. Start with a basic introduction.

Melissa Bradley (@bradleyml), experienced entrepreneur and Executive in Residence at the (@KogodBiz) at American University (@AmericanU), recommends networking with all types of investors throughout the life of the business.

“Get to know them,” she says. “Keep them informed on the progress of your business. However, never ask for money too soon.”

Before you ask investors to fund your business, Bradley advises that you should…

  • Know what they want and how they work.
  • Know your numbers and your business plan.
  • Be on point when it comes time for the investment discussion.

Need a quick introduction to the world of investors? Read “Angel Investors vs. Venture Capitalists: A Primer for Tech Businesses.”

2. Pitching a “Hobby” Business

There’s a difference between a great business idea and a great investment opportunity. Most VCs and angel investors will only go after businesses that have the potential to be big.

“Due to the financial model of VCs, they need companies with large markets and the potential of the company to have significant market penetration,” Bradley says.

A startup should drive revenue and profit, which is incredibly important to VCs as they must make their money back within three to five years. Angel investors, though generally able to target smaller opportunities, operate much the same way.

“In terms of market, they want to know it is big, but they can help size the market as well as identify ancillary markets,” Bradley says.

If your business idea is mainly geared to provide you with a cash flow by doing something you enjoy, investors will probably consider it a “hobby” business and pass in favor of something bigger. If you’re still at the beginning stages, see “3 Things IT Businesses Should Do before Raising Capital.”

3. Relying on an Idea (without Preparation and Evidence)

If your pitch is only “I have a great idea,” you’re going to have a tough time getting anywhere. Investors want to see evidence, planning, and results.

According to Bradley, a VC will want to see a management team with these important qualities:

  • Ability. They’ll look at your team members’ experience and what kind of results they’ve produced in the past.
  • Quality. They’ll want to see a team of committed individuals who are on board. It shows other people believe in the idea and are willing to work at it.
  • Capacity. The more progress you’ve already made at your idea – or “traction” as it’s called in business circles – the more impressive and enticing you’ll appear.

It comes down to a simple question, say Bradley: “Can [your team] do what they say they are going to do?”

Depending on the investors you’re targeting, you might make your pitch at different stages of the business. Bradley notes that many angels “want to know how the business plans to make money, but will also invest in the prototype or pilot to explore the validity of the company’s assumptions and test the potential amount of money to be made.”

Angels and VCs expect the same thing, but Bradley says that you have a little more fluidity with angel investors with how “fully baked” the team and ideas are.

Want more advice on startup funding? Check out “Is VC Funding Right for Your Business?

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