Investors: Watch out for these 10 Warning signs before you invest in a Startup.

Angel investing or early stage investing in general often comes with an automatic disclaimer: “Be ready to lose all of your investment.”

And while this is definitely a possibility, avoiding the companies that implode in a spectacular fashion is half the battle to building a portfolio with a strong IRR. For every company that goes completely bust, you need to generate a minimum 2x return from another investment just to break even.

Every startup, no matter which stage it is at has some early warning signs staring you in the face - just that most investors get carried away with FOMO - follow the herd or that greed takes over. The 1st instinct and that gut feeling, almost always is to stay away yet we fall for the bait. Let's look at some simple warning signs that should give you enough food for thought before investing.

• No Financial Model/Unrealistic Financial Projections: If a startup's financial projections are overly optimistic, it may be a sign that the founders are inexperienced or overly optimistic. Nothing scares me more than someone who is willing to go into business without having run the numbers. We get it, your product or idea may be SO cool. But we need to know if it has a chance to make money. And most businesses are complicated enough that a simple model that can show how the unit economics work and highlight any issues arising from scale is essential. This is a must-have.

If the financial projections seem too good to be true, they probably are. But hey, it's not like you need that money for retirement anyway !

• High Burn Rate-There’s no plan to be profitable.?We know investors in some pretty big tech unicorns had little understanding of how the company would monetize for some time. And some of them have gotten there ( Facebook ) and some are still burning cash away ( CRED ). But as an investor, you should be concerned about whether the Company will actually make money. There are a lot of “tech” companies out there (particularly in lifestyle services) that have been subsidizing the fabulous lifestyles of Millennials, while acknowledging they can’t earn a red cent for investors with their current business models. This should scare you. A startup with a high burn rate (i.e., it is burning through cash quickly) may run out of money before it can reach profitability.
• The founders don’t have skin in the game/Conflicting interests.?When the founders have a cushy banking job to fall back on, you should be nervous. If they haven’t invested significantly in the business, they will be much more likely to pack it in and head home when things get tough. Or if the founders of a startup have conflicting interests or goals, it may make it difficult for the company to make progress and achieve its objectives.

Bonus: If the founders have conflicting interests, just let them work it out. After all, who doesn't love a good soap opera? ??

• The market is very crowded/Unproven Market demand.?Some markets just seem too attractive to new entrants. One example of this is the food/grocery delivery space. It started off as a very unique idea, but because there are no barriers to entry, you now have every possible permutation of food in a variety of stages of preparation being marketed by far too many companies. And I can’t walk out my front door without someone from Hello Fresh tackling me and asking if “I like to eat healthy”. Other side is If there is no proven market demand for the product or service the startup is offering or timing is not right, it may not be a wise investment.

Ignore the lack of a clear business model. Who needs a plan when you have a dream and a vision?

• The founders are just “playing” at the startup game (Weak management team)?Some people think it sexy and glamorous to have a startup. They probably work from the Soho House or somewhere similar. Once they realize how soul-crushing it can be, they are likely to be out the door and on to the next “cool” job. Beware these people, they are often recent business school grads. A startup needs a strong management team with experience and expertise to navigate the challenges of building a successful business.

As long as they have a cool-sounding name like "Disruptive Innovations Inc.", they must be legit. No?

• There are some overcapitalized competitors in the space.?This is one of the toughest challenges. The founders you invested in are diligent, hard working people who are trying to solve a problem in the market. And then all of a sudden the space becomes hot and some competitor that just raised $20 million is splashing all that money around in a crazed attempt at hyper-growth. Let’s hope you can ride out the storm, because those are rough waters you don’t want to be in. If a startup does not have a unique advantage over its competitors, it may struggle to gain market share and generate profits.
• They can’t meet milestones before they run out of cash.?The company has 9 months of runway, but it will probably take 18 months before they can meet the milestones needed for a follow on investment. This is a complicated and sad story, but also one that is dangerous for you as an investor. Unless you enjoy throwing good money after bad.
• They haven’t found product-market fit. Finding product-market fit is the holy grail for startups. But sometimes you just can’t quite get it. No matter how great the product is, be sure you are tracking market adoption. Building great things is for some reason a whole lot easier than convincing thousands or millions of other people to buy them. If a startup has been in business for a significant amount of time but has not made any significant progress or achieved any notable milestones, it may be a sign that the business is not viable.
• They aren’t ready to handle fast growth.?This can be the worst way to die. But it typically happens as a function of some of the other mistakes that have been mentioned. Very simply, if the business model monetizes customers over a long period of time, and the company starts growing very quickly, that growth can actually end up killing the company. It just can’t handle the cash burn and flames out unless someone comes in with a big investment.
• Poor intellectual property protection: If a startup's intellectual property (IP) is not adequately protected, it may be vulnerable to copycats and may struggle to maintain its competitive advantage.

Well, if investors don't heed theese warning signs and decide to invest in a startup anyway, here's some advice:

In all seriousness though, investing in startups can be risky, so it's important to do your due diligence and consider all the warning signs before making any decisions.

Amit ?is a 25-year++ Entrepreneur turned Consultant. He is currently the Director,Practice Growth at?Factoryal , a Boutique Management consultancy helping entrepreneurs in their growth journeys…

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