It’s no surprise many entrepreneurs dream of becoming millionaires. After all, the startups we always hear about are the wildly successful ones. Mark Zuckerberg is now one of the top 20 richest people in the world after starting Facebook in his college dorm room, and Jeff Bezos is worth billions after starting Amazon out of his garage.
If you aren’t willing to take some risk as an entrepreneur, then don’t expect any gain. Yet everyone has limits, and every investor implicitly has similar limits on what makes a startup investable, or one to avoid at all costs. If you need investors, it’s important that you understand their filters, and even if you are funding your own efforts, you need to recognize the red flags.
What do venture capitalists and angel investors cite as the common cause of the failures in their portfolios? That’s a great question, which somebody posed in Quora. And as I write this post, it has several really interesting answers.
Cashflow is a basic survival metric for every startup. Investors check your burn rate to assess your efficiency, and project your remaining runway before you run out of money and into a brick wall. Don’t wait until you are almost out of cash before managing every dollar spent, or looking for the next refueling from investors. Desperate entrepreneurs lose their leverage and die young.
Even though the color of their money is always green, all startup investors are not the same. Struggling entrepreneurs are often so happy to get a funding offer that they neglect the recommended reverse due diligence on the investors.
I can’t tell you how many times I’ve walked away from deals where the entrepreneur insists on a start-up premoney valuation that is so high, no angel could expect to make a return upon the investment, even with a reasonable sales price for the company down the road.
Investment management is a complex process that, if performed badly, can have a negative impact on the sentiment of your investors towards your company as a whole but, if done well, can make a huge difference to the overall perception of investments.
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