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How to Tell If an Investor Is a Bad Fit

Updated: Jun 1, 2022

Pitching investors and knocking on doors for growth capital is an all-consuming process. Not only does it require countless coffee meetings, tedious pitch deck revisions, and many hours away from running your business, but you’re in a vulnerable and emotional position. You need capital, and your business can only survive for so long without it.

While it’s tempting to want to partner with the first investors who says “Yes,” it’s critical to partner with the right investor. After all, these are people who you’ll be working with for at least the next five to seven years.

These are our top red flags from potential investors; the signs you should run, not walk, in the opposite direction.

1. It’s been more than 3 months since they’ve made an investment.

A healthy, stable early-stage seed investor is active. A period of more than three months where they haven’t made an investment should ring your warning bells. Early-stage investors may not toss out Series A rounds at as rapid a rate, but they should still have a reliable cadence. It could be a sign they’re getting low on balance sheet capital and are just taking meetings to network.

2. They can’t provide references.

Partnering with an investor is just that—a partnership. You may not agree on everything (you don’t have to) but you should trust that your investors are going to act in the best interests of the company. Just like a hiring manager may call references to get a feel for your character, you should be doing the same for any investor. Talk to their other portfolio companies to get the nitty gritty on what they’re like to work with.

3. They’ve invested in your competitor.

If you’re checking out a potential VC before you meet with them and you see they’ve invested in one of your competitors, skip the meeting. At best, they offered a meeting without understanding your company’s role in the space; at worst, they’re the unscrupulous type who tries to “fish” startups in a ploy to obtain information and confidential intel. Be very careful how much you share in the early casual meetings and emails. (And note that this doesn’t hold true for banks or debt providers.)

4. They lack industry expertise.

The best investors are ones with deep industry expertise or experience with like business models. If your potential investors haven’t worked or invested in your industry, you may be wasting your time. Sure, they may genuinely want to help you, but if they aren’t able to advise you the way you need to be advised, and connect you to the right people to help you gain traction, your benefits will be limited.

5. Unrealistic expectations.

How confident are you that you and your investors are in alignment? If your investors seem taken aback by your growth projections, are constantly asking about your exit plan, or are being pushy about what advice you should—and shouldn’t—take, then perhaps your expectations don’t line up. These are signals that you’re in for a bumpy ride with the potential investors. Remember, you should be a team. Having a baseline agreement on expectations is a good place to start.

Being mindful about who you work with takes time, patience, and gumption. But if you get to partner with intelligent, trustworthy investors who can help your startup soar, it’s all worth it in the end.


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