After watching thousands of presentations and pitch decks over many years, even the most experienced angel investors – and VCs – can overlook red flags that are subtle and not immediately apparent. I know this from my own experience: In addition to many wins, there are some investments I wish I had turned down. I missed the red flags.
To minimize the chance of learning the hard way, below are my top subtle red flags that angel investors should heed when evaluating a potential investment. By staying vigilant and knowing what to look for, you can make informed decisions and avoid opportunities that you determine are not worth the risk.
A team out of balance
An important factor when considering an investment is whether the business expertise and technical know-how of the founding team are balanced.
Even the most seasoned angel investors and VCs can overlook red flags that aren’t immediately apparent.
I’ve heard pitches from many life science companies with highly experienced and innovative tech founders without any business expertise on the team. Conversely, I’ve seen companies with many excellent business professionals who fall short in their technical prowess. A founding team must always have relevant, gifted technical expertise to be viable.
Without a well-aligned balance of business acumen and technical savvy, a startup can struggle to develop, bring to market, scale their breakthrough product, and attract customers and investors.
Frequent staff turnover
Frequent and high turnover is often a red flag for investors, as it usually indicates instability and internal conflict within the founding team. Turnover disrupts the company’s operation, culture and growth trajectory. It’s a red flag that the company is being swallowed up in drama while its mission is largely sidelined. A revolving door showing that the company cannot retain top talent will have a negative impact on its financial outlook, both in the short and longer term.
Instability in a founding team can manifest itself in ego-driven, abrasive management, favoritism and unfair compensation – problems and inequality that cause people to leave.
Tweaks in leadership are normal and healthy as a company grows. But when these changes happen too often, investors should pay extra attention, as it often suggests deeper problems in the company.
