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22 Angel Investment Red Flags

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Red Flags for Angel Investors: What to Look Out For


Tim Berry
Tim Berry

5 min. read

Updated December 11, 2024

Last week at an angel investment meeting one of our group members asked whether anybody had a list of red flag problems that would immediately eliminate a startup from consideration by angel investors. That seemed like a good idea to me then.

And over the weekend somebody asked a similar question in Quora: what are some red flags for people new to angel investment when evaluating companies.

This blog post is a compilation of my own items and a lot of others contributed to the Quora question.

Alternative truths don’t fly. Lies, gross exaggerations, hiding significant information. Fudging past financial data. Not mentioning about or grossly exaggerating their previous business history. Omitting significant facts.

The pitch brags about a founder’s previous successful exits that turn out, later, to have been either grossly exaggerated. Founders holding back critical information for problems of perceived confidentiality or trust.

Lawsuits that weren’t mentioned. Cap tables that hide things. Gaps in the history.

For example, the scientist alone, instead of the scientist in a team with experience in the industry and business sense and experience. Or the team that lacks the CEO and is promising to get one after funding. Or the team of very young people that assigns all C-level positions to team members without realizing they need somebody else.

Lack of domain expertise

Anyone can have an idea, but if the person you’re considering has no clue about what’s possible, what’s been done before, or even a tangentially related background – that’s a huge red flag.

See also  11 Key Components of a Business Plan

There’s a certain amount of arrogance expected in an entrepreneur (they need to beat down their competition), but if they aren’t willing to consider outside advice or suggestions, stay away.

I shouldn’t need to say this, but the majority of ideas are actually just bad, really, really bad. Yes, you are investing in the human, but that doesn’t mean you should throw money at a bad idea in the hopes that something they come up with later might be good.

This is like one of those logic puzzles. Every time I hear someone say “we have no competition” it immediately is a red flag, for two reasons. One, it’s a sign they haven’t done their research, because there’s always competition, or at least something comparable. Two, it’s a sign they might be naive enough to actually think it’s true. Either way it’s a sign to stay away.

Four more from Heather Wilde

Does the CEO do things that are highly unethical or technically crimes? If so, you may have a Theranos or Zenefits on your hands. Red flag.

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