There are many early-stage growth companies sprouting from rich, plush entrepreneurial soil. But as the number of those sprouts rise, it can become harder to identify which ones will one day wear the thorns. Luckily there are many hints on the surface that can save you from getting pricked. Here are four red flags to avoid before investing in your next early-stage growth company.
1. High Burn Rates
If revenues are not steadily rising on a month-to-month basis, watch out for overhead and high expenses. Profitability always prevails as the single most important thing in business and as such, the very first dollar the company is able to generate is extremely important.
2. Lack of Support From Early Investors
If the company has already raised capital in their earliest stage, it can be very telling if the majority of investors are not reinvesting. There are many reasons for such an outcome, but you need to nail down why. Maybe the investor(s) simply ran out of capital to contribute, or maybe there’s something else. The key is to learn the reasons behind the facts.
3. Too Many Founders
Now, it’s okay if a company has more than one founder, and actually, it’s preferred by many in the investor market. It’s hard for just one founder to attract enough A+ talent to run a well-oiled machine firing on all cylinders. However, be cautious when the number of founders climb over three. With so many egos left to handle the growth and execution of the business, the growth process can actually lag and even come to a stop. The saying “too many cooks in the kitchen” has long-survived for a reason and it would be remiss to not make mention of it here.
4. No Momentum
When you take a look an investment opportunity, sift through the long-winded numbers and charts and identify what the main metric for growth is. If the metric is not growing at a decent pace (or at all) month-to-month, you can be sure that the investment will carry some risk. But that doesn’t necessarily have to be the nail in the coffin, sometimes all it takes is just a few small and inexpensive tweaks to get the ball rolling.