Investing In A New Startup – Red Flags That Tell You To Run Away

We all know that startups fail; to be more precise, nine out of ten startups will fail, which makes a staggering 90% chance that the startup you are about to invest in won’t succeed on the market. These numbers can be hard to comprehend, especially for the founders and entrepreneurs who are launching their business, and that could be fatal for their success. It is, therefore, a common practice for the startup founders, according to the Forbes article, to write their failure post-mortem before business launch.

The reason for this practice is the necessary dose of reality for the overly positive founders and entrepreneurs who simply need eye-opening statistics that will inform their future decisions. For a startup to succeed it’s not enough to say ”do my essay for me, the founder needs to work hard, but also smart, hence the statistics check and a rational approach to the possibility of failure. But, what happens when you come across a startup that is just doomed to fail? Here are some signs and red flags that are telling of whether a startup is a sinking ship, and whether you need a lifeboat.

Startup Investment Red Flags Article Image

No Market Demand

The lack of a market need for a product can be devastating for a business. If you are about to invest in a startup, make sure you are considering the business’s potential on the market. If the business owner seems unsure of their future development and growth, or whether they are entering an already crowded marketplace where there is no market demand for their product, it’s time to hit the road and look for a worthy startup elsewhere. According to the CBInsights study, which analyzed 101 startup post-mortems, around 42% of the failed startups simply had no market need.

However, not only is the growth potential of a startup of great importance, but also whether it differentiates from competitors, even if that very niche is already crowded. So, before investing in a new startup, make sure to check with the founder the exact numbers and percentages of what they plan to get a hold of in a specific time frame in the future. If you receive no answer, then there is probably no future for that business either.

The Founder Is Not A Leader

If you are investing in a startup, a person, or a team, the most important thing you can do is look into the personality and character of whom you are investing in. In order to succeed, or even survive on the market, the founder needs to be a resilient visionary who has a specific plan and argument on how to infiltrate the market.

A failing startup, however, is usually „led“ by a confused founder who seems distracted and who works on projects that will not lead to success and a common goal. There are even cases where the founder possesses the traits of a leader but simply made a huge mistake when choosing a team. The founder is an exceptional, hard-working visionary, but the team around the founder is simply inappropriate. If the team members, and even the founder, lack experience, will to grow and improve, passion or the skills to carry out essential tasks, then you can be sure the market will become impervious for this business.

No Business Model & Bad Marketing

A successful startup business has a business model intended to serve for at least the following year, taking into consideration the possibility of failure, of course. However, an astonishing number of 17% of all startup founders admitted to not having a business model, nor a backup plan in case of a failure. By not having a business model to go by and to carry out the plans and efforts of the startup, the founder basically enters the market without a basic organizational structure to back a product or an idea.

Another warning sign of a failing startup is bad marketing. Since the market and market demand change regularly, not having a good and sustainable marketing idea will inevitably lead to the failure of the business. The public’s demand needs to be met by not only a product but also by the company’s ability to adapt to change and modern trends.  Good marketing will enable the business to take advantage of their competition, organize good and innovative campaigns and establish the startup’s reputation on the market. If a startup you were to invest in has ineffective marketing, you know what to do.

Overall…

If a startup seems like it’s not bound to success, it probably isn’t. So, observe carefully whether a startup is just another flop, and save your money.

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