Fundraising: WHY 'fake it till you make it' does NOT work - and what does
Over the last few years, we've seen some nasty headlines from startup founders who run amock, showing that not every investment is what it seems, no matter the spotlight it's given.
Having names like Elizabeth Holmes and Sam Bankman Fried who at first glance checked all the right boxes, but later showed to be something completely different that what they were percieved tobe, made investors think hard about what the major 'red flags' are to look out for in a founder before they invest.
Here are five things to look out for in a founder to raise red flags
1. They aren't part of the community
One of the earliest pieces of advice I received from a startup founder was "You have to need the product". While this doesn't apply to every startup, it's a good piece of advice that encourages founders to be in tune with their customer base.
If you find a founder who pitches his solution but sounds like an employee with an MBA instead of an expert in his field - it's your queue to pull back...
Usually, these founders aren't part of the community they serve and aren't aware of their customer's pain points. If they haven't gotten any proven track record, then don't take their word on there being any future sales.
2. They come with a catch
A good founder is devoted to his team and his community, and invests in others knowing 'what goes around comes around'.
A red flag to look out for is 'favors' that come with a price, and they usually come in one of two forms:
If you are in negotiations with a founder who is constantly trying to balance the scale, always adding grandeur to their own efforts to convince you that asking them for more is selfish, then he'll fall short of doing his part in building the company as well.
Your founder needs dedication and commitment, not constantly 'counting pennies' when it comes to effort and value.
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3. They are cheap
If you are invited for a Zoom meeting, and the founder you're meeting hasn't gotten a subscription and is disconnected at the 45-minute mark, you'll want to think twice about moving forward.
While being financially wise is a virtue, being compulsively fearful of spending money to streamline workflow and empower the team is an issue that affects a company on many levels. Not only does it decrease efficiency, but it has a major effect on company culture and creates frustration and discouragement among team members.
That characteristic reveals tendencies that will make cooperation and communicating difficult moving ahead, with every decision will be made with the unhealthy precedent of "saving money", crippling the company to progress.
4. They deflect and defer
If your founder can't answer a difficult but straight-up question without being subtly manipulative in order to not 'be put on the spot' or answer hard questions that might question their authority, you can bet that they won't share accurate information regarding their company, results, and progress with you, as they'll do anything to never put themselves in a negative light.
5. They are conspicuous about their workflow
If you aren't allowed 'behind the scenes' to see where your founder gets his results from you can't trust that they are legitimate.
With every company having several streams of income, a PowerPoint presentation of social media stats presented as 'goodwill' doesn't translate to sales and traction.
After NDAs are signed, your founder should freely share, without hesitation, every relevant piece of information concerning how their company works and where they are making their money.
Fake it till you make it doesn't work
Faking it until you make it doesn't work - because in order to make it, a founder needs to work together with his team and his investors to turn their company into a success.
Do all the due diligence necessary, but most important, don't neglect your gut feeling about people. Never be afraid to question or even confront, it might be the act that saves you from losing your investment.