Five early "Red Flags"​ for Investors in #Startup

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The startup has indeed become a cult around the world and the Indian market is no different. We at Synapse encourage entrepreneurship, as we consider them similar to “Orion Nebula” for most of the new disruptive ideas. However, it’s also true that there are many Blacksheep hiding under the same blanket. It’s important to identify them early as Investors are bombarded with the prospect of investment and they need to put their efforts in the right place.

After spending over a decade in healthcare and being part of many diligences, here are a few tips for investors to identify the Blacksheep at a very early stage.

1. A short half-life of energy in the founder

Every investor is looking for energetic promoters. As #AshneerGrover puts it “Idea to chawri bazar main 2 Rupay kilo main bikte hai” the real game is execution. We may not agree with him fully, but the argument has some merit that execution is key to success.

If Investors find the level of energy is diminishes rapidly in every subsequent meeting then it's time to look beyond what is presented by the founders.

2. Founder proposes not to draw salaries

We have seen a rise in this statement, in which promoters in an effort put significant weight on their level of commitment and proposed not to draw any salary for a defined period. They are essentially saying that they will use the entire amount of investment in the business and will not draw any personal benefits.

Upfront this is an impressive statement, however, the truth is that all business takes time to grow and requires a level of mental stability in promoters to achieve it. We all have the liability to maintain a certain level of life, without which it is impossible to focus on the needs of a startup. In my experience, no investor is averse to the idea of basic remuneration for the founders.

This may be a case where the proposed business is secondary for the founder or there are other ways to earn from the business, both may be a verse case for any investor.

3. Founders are averse to taking any debt in the company

We all have been told to keep our distance from debt right? However, the truth is no business can survive without considering it as one of the methods of financing.

The cost of debt is much lower than the private fund, also a well-calculated debt brings significant financial discipline to the company as liability needs to be paid at periodic intervals.

A debt averse fonder is a sign of underconfidence in maintaining a steady stream of revenue and allocating the financial resource judiciously.

4. A spurt of Investments just before reaching Investors

One of the most common occurrences, especially for the startups preparing themself for 2nd or 3rd round. We have observed a significant spike in investment 6 -7 months before they start approaching investors.

This activity suggests that the focus of promoters is on increasing the valuations of the company in a very short span and may not have given deep introspection on the deployment of financial resources. In a few cases, this may be needed as the business has shown a sharp rise, however, this must be critically analysed before moving forward.

5. The future of the business is heavily dependent on raising the capital

This may have fewer occurrences but a very interesting one.

Let me share one of our experiences, where everything was right, a business idea was great, and the founder was competent and had the enthusiasm to execute the business, however when Investor asked “ Will you continue the business, If I don’t invest now?”.

The promoter was not confident thus entire deal went off track.

It’s essential to have the founder's commitment irrespective of fundraising scenarios. The business may grow slowly without it, however, it must continue.

For discussion and brainstorming sessions, please reach manas@synapsehealthcare.net