• John Kador

Seven Early Warnings Signs of Startup Failure

Angel investors have learned to run the other way when they see certain warning signs in the entrepreneurs that approach us for funding. This two-part article describes the most common hazard signs that make angel investors say “Thank you. Next!”

The newbie angel bubble is beginning to burst. And as a result, the remaining “smarter” angels are upping their expectations of startups. And that’s a good development. Many of these newly-minted amateur angels were hoping to score the next PayPal or Twitter. But they’ve now learned what the angel pros have known for a long time. There are few investments riskier than funding startups. As a result, many of these amateurs are moving on to greener, safer pastures.

The angels remaining are more businesslike and demand a higher level of rigor and professionalism from themselves and startups – which is good for everyone! There is less tolerance for certain hazard signs.

Seven Early Warning Signs

From my conversations with my colleagues at the New York Angels, a consortium of 115 investors who have put more than $75 million into fledgling enterprises, I came up with a list of seven early warning signs that startups must avoid.

1. Not sounding like they’re in control – Angels need to see all the startup’s founders pulling together as one. Business models and product features can all be changed, but the management team must be rock steady and aligned. A history of working together is usually a good sign that the team will make it—victory or defeat—together. It easy to see and uncomfortable to feel. Walking into the room and getting started is marred by a confused and unrehearsed team. The slides have typos and don’t seem to be in the right order.

2. An unwillingness to launch fast and listen – Remember that smart iteration is the new innovation. Angels know that the best way to educate a startup is to get a product or service in front of customers as quickly as possible and get “smarter faster.” An unwillingness to listen often suggests a quest for perfection. Perfection kills startups. Founders need a collision with realty as quickly as possible.

3. Insufficient commitment to metrics and analytics. Measurement is rarely simple. Even so, angels need to see a clear appreciation of knowing what to measure and the discipline to adapt, as quickly as possible, to what the metrics reveal. A special mention warning sign: when the founders use a top-down market analysis of the form: “This is a $25 billion industry. If we can capture just one percent . . .”

4. Can’t quickly demonstrate a clear user need. Merely articulating a marketing inefficiency isn’t enough. The founders must immediately connect the dots to a compelling business need, supporting actual customer behaviors. If the founders can’t tell me how the venture helps customers make or save money, or whose job does the venture eliminate or make easier, I tend to move on.

5. Fear of research or testing hypotheses. The enthusiasm that many startups project can be seductive and myopic. Enthusiasm is necessary—startups are difficult and painful—but it can also cloud the judgment of founders. Only a brutal confrontation of “seeing” reality can temper blind enthusiasm with focused judgment.

6. Confusing a feature with a business that needs to scale. Many startups show me a presentation, and maybe it’s a good one, but where’s the complete business? Features and capabilities are not businesses. Creating a true business is infinitely harder. A product capability (feature) may be exciting and useful but a business pays the bills and promises to throw off revenue. I want to see a sustainable, scalable business.

7. Lack of genuine love and initial connection with real customers. A startup can’t succeed in serving customers if the founders aren’t totally dedicated to the customers. That kind of commitment can’t be sustained unless the founders have a genuine passion for and respect for customers that approaches love.

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