When it comes to investing in a start-up, there’s an inherent risk in your decision. However, that doesn’t mean you shouldn’t invest. Start-ups are where many of today’s biggest companies came from. So it’s not just a gamble — it could be a very smart investment. At the pre-seed funding level, each of your insightful questions and each interaction counts. As an investor, you and your family can get burned, ruined, or left with nothing when all is said and done.
It’s hard to know whether a company has a solid business model and can turn an influx of funding into profit, so spotting these eight red flags is crucial to your success.
They don’t have a clear plan for what they need the money for.
This is the first thing you should look out for when evaluating a start-up. If they don’t know exactly how they are going to use your money and can’t give you a solid explanation of how it will help their business grow, then it’s probably not a good investment. They might just need your money because they can’t get funding anywhere else—and that’s not necessarily going to be worth giving them yours.
They don’t seem to understand their market.
No one who is serious enough about their business to ask for investments will be unsure of their market. If they don’t know who their target customers are, if they think the whole world should buy their product, or if they can’t explain why people would want what they’re selling, then this is a huge red flag. Don’t invest in someone who doesn’t know how to navigate within their own chosen market.
They’re not excited to let you talk to any of their employees.
A start-up might be a scam if they’re not excited to let you talk to any of their team members. They may not have a huge team, but chances are they have some other people involved with the business. If you can’t meet the team or the person gives you excuses, it could be a red flag that they don’t actually have any team members.
Are you talking to one person? That’s strange. Are the other people too busy to meet with investors? That’s another weird thing—you would think they’d want to meet with people who are potentially going to invest in their company. Be careful if a company doesn’t want to introduce you to its team members, or if it has an excuse for why you can’t talk to them.
The founder appears disorganized or highly stressed.
A start-up might be a scam if the founder appears disorganized or highly stressed. While start-ups can be very stressful, what exactly is causing so much stress to the founder? Are they struggling to sign up new clients or investors? Are they having trouble keeping employees on board? Or are they simply overwhelmed by the task of running a company? Next time you interact with a founder, pay attention to their demeanor and body language. An overly stressed and disheveled founder is a red flag.
They don’t care about their customers.
A scammer’s goal is financial, not to provide stellar customer service. So they won’t waste time and resources on things like user-friendly websites or personalized customer service emails—or any customer service at all. But if the company takes the time and effort to engage with its customers and give them what they need and want, then it probably has good intentions as far as making a profit responsibly goes.
Their numbers don’t add up.
While it’s not unusual for startups to have a few rough years before they start turning a profit, they need to keep track of their expenses and revenue in order to properly assess their financial health. If a company is making grandiose claims about its growth potential, performance figures, and the amount of capital they have raised, you should seriously consider whether they are telling the truth.
They’re betting on multiple horses in the race.
How many other similar start-ups or full businesses is this person running? If they’re operating the same exact business model under multiple business names, it’s likely a scam. These scammers will keep trying to raise money until one of their several businesses gets off the ground—and that’s where you come in. If you’re going to invest in a start-up, be sure that the people behind it aren’t running several identical businesses at once.
The website or applications are riddled with errors.
A start-up might be a scam if the website or applications are riddled with errors. Similar to customer service, scammers don’t care too much about grammar, spelling, and user experience. They’re just trying to get your money and run, so the site’s design will likely follow suit. Look for broken hyperlinks, misspellings, grammatical errors, poor user experience, excessive redirects, vague language, and lack of proper contact information.
Investing in a start-up is fun and exciting, but it can also be risky. While you can definitely earn a handsome return on your investment if the business takes off, that doesn’t mean you won’t lose a lot of money if the company fails. To mitigate these risks, focus on slow, steady growth that may take longer to reach its full potential–but will likely yield more profits for your initial investment (and for the long term). You should also look for businesses that plan to stick around for a while. There’s nothing wrong with investing in something small or experimental, as long as its success is predicated on long-term viability.
If you’ve been the victim of an online scam, Active Intel Investigations is ready to investigate your case.