Red Flags in Due Diligence

Red Flags in Due Diligence

May 19, 2020 by investor

Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

In due diligence you may encounter red flags indicating something is wrong.

Here are some that I’ve found:

The founders are not investing any of their own money into the business.  

The cap table is crowded with many small investors. That means the earlier funding was a challenge.

The team is incomplete. Either the solo founder wears too many hats or everyone is a tech developer, which means no one is out selling it.

Lack of awareness of the industry, especially the regulatory side.

There are no KPIs or operational metrics to review. 

Plans are generic and lack specific customer names or revenue amounts.

Loads of debt and previous investors have no further interest in funding or supporting the business.

The business appears to be setup to be the CEO’s lifestyle business. 

Hockey-stick projections with no apparent supporting evidence.

There’s no board of advisors or directors. The team you see is what you will get.

The financials use year 1, year 2 naming, rather than actual years.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.