Green flags you should look for in early-stage investors (and red flags to avoid)

Not all investors are created equal. Some will go to the ends of the Earth to support their portfolio companies, while others take a hand off approach and only engage when asked. And a select few (unfortunately) end up being a drain on a founder’s time or energy, and in a few extreme cases (see: MySpace) can cause a company to completely fall apart.

Here are some green flags to look for when evaluating potential investors for your early stage startup, and some red flags to keep an eye out for to protect the valuable entity you’re creating.

🍀 Investor Green Flags

🧠 Industry Expertise

Investors with a background (either as an investor or operator) can provide valuable strategic advice, introduce you to key players in the industry, and help you navigate complexities that are unique to your market.

🌐 Network

An investor’s network is often one of the most valuable assets they can offer to their portfolio companies. An investor with a strong network can open doors to potential customers, strategic partners, talented employees, and even future investors.

🖊️ Operational Experience

Many serial entrepreneurs will tell you that they’re favorite investors are previous founders or startup operators. The reason should be obvious: their firsthand experience allows them to provide valuable guidance, help you avoid common pitfalls, and accelerate your company's growth trajectory.

🔭 Long-Term Vision

Many founders don’t consider the fact that when you accept money from an investor, you’re committing to a potential 10+ year relationship. Look for investors who have share your long-term vision for the company and who are committed to being on your side through the ups and downs you’ll face over the years.

🎁 Value-Add Support

You’ll sometimes here people refer to certain investors as “dumb money.” These are the investors who have nothing to offer other than pure capital. Optimize your search to prioritize investors that provide some kind of value beyond a check, weather that be assistance with sourcing employees, creating brand design assets, or acting as fractional product managers.

🚩 Investor Red Flags

😡 Overbearing or Controlling Behavior

Investors who exhibit this kind of behavior are often trying to overcompensate for their lack of experience or to placate their overinflated ego. This can ultimately lead to situations where they undermine your autonomy and hinder your ability to make important decisions for the company.

😶🌫️ Lack of Transparency

If you encounter an investors who are not transparent or forthcoming about their intentions, investment terms, or potential conflicts of interest, run run RUN away and don’t ever look back. Clear and open communication is essential for building a strong investor-founder relationship.

🙅♂️ Conflict of Interest

Conflicting interests, such as investing in competing companies or holding conflicting board positions, means that investor has placed their own agenda over the best interests of your company. Pay careful attention to an investor’s existing portfolio and for any conflicts of interest before accepting a check.

🥸 Short-Term Focus

Investors who prioritize short-term gains over long-term value creation may pressure you to pursue unsustainable growth strategies or premature exits. Be especially wary of investors who ask for an “Exit Slide” on your pitch deck. Any investor who is thinking about an exit at PreSeed does not have your best interest in mind and is instead thinking about how they can make a quick return for their LPs.

🍰 Excessive Dilution or Control

Some investors will try to demand an excessive amount of equity in exchange for a large amount of capital or a service like helping to build your MVP. Giving up too much equity can limit your ability to hire key executive or, in the worst case, destroy any opportunity for attract future investment. A good rule of thumb is to follow: you should give up no more than 20% of your company before raising your Series A; aim for ~15% at seed and you’ll be perfectly fine.

💡 Remember: It's YOUR company, not theirs!

While investors can be a helpful and useful resource to guide some of your decision making, don't forget that it's ultimately YOUR company. Investors are only every operating with the information you provide them, so their advice is often limited by their point of view.

Always remain open to feedback; but don't let investors dictate the direction of the company for you. Listen, consider, and act according to what's best for YOU and YOUR business. At the end of the day, you have to wake up the next day and deal with the consequences of your decisions, not your investors.

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