No matter how confident the founder is about his company, a good portion of start-ups fail. If you are thinking about investing in a startup, look for these warning signs before you decide to put your money into it.
It’s not possible to have 100% accurate financial projections in the early stages, so if the executives or founders promise you high ROI for the next 10 years, be wary of them. They might be over-promising – or it could be a business scam. According to an article at Early Investing, it’s best to focus on the unit economics: how much a company expects it to cost to acquire customers (cost per acquisition, or CPA), and how much revenue it expects that customer to generate over their lifetime with the business (lifetime value, or LTV).
If founders are throwing multiple income generating ideas that they promise to launch all at once in the business, it’s a signal that there will be a lack of focus in the long run. This may also cause management issues which will affect the entire business down the road.
Founders with questionable backgrounds
While you shouldn’t be so quick to write off founders who have failed in his previous business, you do have to take note of why they have failed. If it’s due to market demands; that’s something they couldn’t control or predict. However, if it’s because they had a fall out with their business partner or there were legal complications, you would need to be careful. Also if a founder has ever been legally convicted for any sort of illegal business activities, forgo this startup. It’s not worth betting on someone who’s unreliable.