FUNDED – By Angel Investors Ontario has a great new article called “BUYER BEWARE”. I encourage both new and seasoned investors to read this piece, and have them pass it on to new entrepreneurs for them to read too. 

The theme of the piece is for prospective investors to watch out for some of the “Red Flags” that might surface while you start to examine a new investment opportunity. Writer Lisa van de Geyn interviewed a number of ecosystem members to recount some of the more important flags that certainly should be cause for concern in the diligence process. My favorite is to be cautious about founders that appear to be not coachable. Ideally, you want a founder to be surrounded by individuals who can constructively critique a founder. Mentors are included in that category, and as many investors become mentors, they want their advice and experience to be listened to. I have stepped off the board and stopped additional investment when it became clear the Founder made their own decisions that were contra to what the board, including investors, had mandated. How defensive the founder gets when confronted with the concerns is also an important factor.

Hopefully you will note flags before you get invested, such as founders who are missing key paperwork, especially around IP ownership, and shareholder agreements with former founders. I worked on a project for a while and refused to start looking for other investors, until I received all my answers, which included the fact the founder had not yet transferred IP ownership to the company. The article also illustrates that many founders are unrealistic about how long the current cash funded runway will last. Sometimes this disconnect can occur when a former big-company founder is not used to the startup side of business, and also when they ignore common sense practices that would quickly show that cash is running out before new funding is possible. I remember one investment where we were told by the CFO that they had 6 months runway, only to be corrected a week later with 6 weeks runway because they had forgot to add the cost of 6 new staff added two months ago.

You don’t need to be a professional accountant to be able to read through founder-provided documents to sense that common sense would tell a different story. Go and test your concerns with some of the members in your local angel group, or join the group to get access to like-minded investors.