After viewing hundreds of displays and pitch decks over a few years, even probably the most skilled angel buyers — and VCs — can overlook crimson flags which might be delicate and never instantly obvious. I do know this from firsthand expertise: Together with many wins there are some investments I want I’d turned down. I missed the crimson flags.
So that you simply reduce the probability of studying the laborious means, what follows are my prime delicate crimson flags angel buyers ought to heed when evaluating a possible funding. By staying vigilant and understanding what to search for, you may make knowledgeable choices and steer clear of alternatives that you simply decide aren’t definitely worth the threat.
An out-of-balance group
A key issue if you’re contemplating an funding is whether or not enterprise experience and technical know-how of the founding group are in steadiness.
I’ve heard pitches from many life science firms with deeply credentialed and revolutionary technical founders with completely no enterprise experience on the group. Conversely, I’ve seen firms stuffed with many excellent enterprise professionals which might be poor of their technical prowess. A founding group should at all times have related, gifted technical experience to be viable.
And not using a fine-tuned steadiness of enterprise acumen and technical ingenuity, a startup could battle to develop their game-changing product, carry it to market, scale the enterprise and entice clients and buyers.
Frequent workers turnover
Frequent and excessive turnover is usually a crimson flag for buyers because it normally signifies instability and inside conflicts inside the founding group. Turnover disrupts the corporate’s operation, tradition and progress trajectory. It’s a crimson flag that drama is consuming the corporate whereas its mission is generally sidelined. A revolving door displaying that the corporate can’t retain prime expertise will negatively affect its monetary prospects, each brief and long run.
Instability in a founding group can present up in ego-driven abrasive administration, favoritism and unfair compensation — points and inequity that can trigger folks to depart.
Techcrunch occasion
San Francisco
|
October 13-15, 2026
Tweaks in management are regular and wholesome as an organization grows. However when these adjustments happen too incessantly, buyers ought to pay specific consideration because it usually suggests deeper points within the enterprise.
A way of life enterprise with no exit plan
The founding father of a way of life firm is motivated to create a sustainable, worthwhile enterprise that permits them and workers to take pleasure in a specific way of life. They haven’t any intention to develop quickly or obtain an exit by acquisition or IPO. They could, nonetheless, look to hunt funding to develop their product or geography.
Right here’s what you have to learn about a way of life enterprise. It depends on the proprietor’s experience and private relationships. And not using a succession plan, the enterprise is susceptible if the proprietor leaves or is now not capable of run the enterprise.
Though you’re an investor, chances are you’ll run into secrecy round “opening the curtain” and getting near the small print of the enterprise. As a result of the corporate relies upon solely on the proprietor, your exit choices are restricted. The proprietor doubtless has little interest in promoting the enterprise, and valuations are decrease within the occasion the proprietor decides to promote.
I do know of some firms that match this profile. Buyers who thought they have been funding a very good deal that might repay are nonetheless searching for a return on their funding or an exit bonus greater than 20 years on.
The founder is a charismatic liar
Whenever you discover a firm you’d wish to put money into, it’s crucial to vet the character and integrity of every individual on the management group. Pay further shut consideration to the founder.
Whereas charisma in a founder is a beneficial asset, that charisma can depart you spellbound. A charismatic and non-charismatic founder ought to get the identical thorough vetting. We get our greatest classes from the college of laborious knocks. I made a small funding in a single specific startup. Sadly, different buyers had bigger funding stakes on this firm. All of us misplaced our capital.
I used to be swayed by the charismatic founding father of an AI firm who dazzled together with his skill to influence. Initially he was truthful, which is why I didn’t see the crimson flags. However when he received a prize for his revolutionary firm the popularity went to his head. He lied in regards to the enterprise numbers. Buyers uncovered the false numbers once they sensed one thing was amiss and probed to seek out out.
They found two units of books: a made-up one for buyers; the opposite with the actual numbers. It is a cautionary story for startups to have an unbiased accountant who evaluations the agency’s books frequently and shares the outcomes with all stakeholders, together with buyers.
Though a founder could declare they’re clear, make certain they show it. Purple flags that they might attempt to hoodwink you:
- They present successes and say nothing about challenges.
- They make commitments however don’t ship in accordance with the dedication.
- They fail to reply in a well timed method if you contact them or reply weeks later as a result of they’re avoiding you.
- They don’t need to reply your laborious questions and inform the reality. Don’t be tempted to excuse it.
Different warning indicators: Do firm leaders current a far-fetched imaginative and prescient of exponential progress? Does the founder withhold crucial info you have to know? If one thing seems to be too good to be true it in all probability is. When you encounter any indicators of dishonesty or inconsistency within the founder’s statements and actions, run for the hills.
A Romeo and Juliet management group
Whereas there have been efficient groups the place the founder has a romantic or spousal relationship with a workers member, there are big dangers.
From an worker standpoint, the couple is untouchable even when one in all them is a poor performer. Solely the companions can partake in pillow speak in regards to the enterprise.
If the connection sours it’ll have a damaging affect on this enterprise. Workers will really feel pressured to take sides, which will likely be disastrous for the enterprise. A startup I thought of funding had a pair going by a divorce. Because the divorce turned extra contentious, the enterprise suffered and ultimately shut down.
If a partner group leads the enterprise, chances are you’ll run into an absence of range of thought and perspective. The traits that attracted them to one another could also be traits that perpetuate the established order, leaving them closed to different’s views.
An influence couple could hog energy to the purpose key group members really feel intimidated and hesitant to completely contribute. When creativity and innovation are stifled, the corporate will discover it tough to develop, pivot or adapt to altering market circumstances.
As an investor you have to completely analysis and perceive the businesses you’re contemplating investing in. You should put on two hats: one for vigilance; the opposite for belief. You will need to stay each vigilant and trusting all through your relationship with an organization you’ve helped fund.
Don’t suppose that now that you simply’ve vetted and funded an organization you may flip away and belief the founder and their group to truthfully and ethically construct the enterprise. A founder who lacks an moral core is not going to hesitate to do every thing attainable to get their palms in your cash.
The brutal reality is {that a} founder can change after initially showing to be sincere — recall the founding father of the AI firm I funded who flipped after profitable a prestigious award.
Whereas it could sound just like the startup ecosystem is teeming with scoundrels, the overwhelming majority of founders are sincere, even the charismatic ones. My recommendation is to maintain your coronary heart and head in steadiness. That means you’ll shield your self from investments that go nowhere, and also you’ll weed out the odd needle in a haystack fraudster lurking in your potential founder roster.
