While it may seem counterintuitive, there are certain venture capital firms/funds that start-ups should steer clear from. So for example, if an investor talks to a start-up founder as if he/she is merely asking for money, rather than looking at the endeavour as a true partnership and a win-win situation for both, then that would comprise a red flag for the entrepreneur. Also, start-up companies should stay away from investors who think they know more about the business than the founders themselves. One capital venture firm principal even stresses that the entrepreneurs need to be comfortable with their potential investors, stating “it’s not necessarily what the investor says, but how the investor makes you feel….Trust your gut feeling”.
Every new business encounters problems and challenges throughout its journey. For Hyperpay, a professional payment gateway, Mastercard and Arab Bank did extreme due diligence on the company in the final round of funding, and arrived at remarkable findings. Both institutions stated they’d approve the investment if Hyperpay fixed a number of issues within certain timeframes. These included ISO compliance matters, obtainment of specific certificates and the creation of new departments, which all led to a revamp of policies, procedures and structure. Although it was an exhausting process, its founder –Muhannad Ebwini- describes it as an “interesting exercise”, stating that as a result, the company was turned around and he is now confident that it is completely compliant with any stringent criteria.
Also, a new company may face many rejections from potential investors. As a result, a considerable number of founders have come to realize the significance of mentioning company features and characteristics in the pitch to investors, which would illuminate the uniqueness of one start-up over others in the market. One founder described this by saying that “I have to show something, I have to show a different value”. VCs agree that “lack of differentiation” is considered a red flag for investors, since too many companies look like a replica of something that exists already. Other red flags raised by investors include the start-up not having a full-time founder, lack of knowledge of the competition and the founder not being mission-driven.
Another point of convergence between the investor side on the one hand and the founders on the other, is the significance of the start-up teams. A prime consideration for some investors -such as Flat6Labs- is meeting all the co-founders to assess “complementarity of skills” and how decisions can be taken. The team’s track record is reviewed, in addition to what the team members have been a part of before and what they have done. Numerous VCs prefer dealing with more mature start-ups and founders because this is an indicator on the ability to build faster and execute. For start-up founders the teams are extremely crucial for support and recovery during challenges such as spikes in churn rates. Thus, it is important to set a vision for the team and truly appreciate them.
