After viewing thousands of presentations and pitch decks over many years, even the most experienced angel investors — and VCs — can overlook red flags that are subtle and not immediately apparent. I know this from firsthand experience: Along with many wins there are some investments I wish I’d turned down. I missed the red flags.
So that you minimize the likelihood of learning the hard way, what follows are my top subtle red flags angel investors should heed when evaluating a potential investment. By staying vigilant and knowing what to look for, you can make informed decisions and stay away from opportunities that you determine aren’t worth the risk.
An out-of-balance team
A key factor when you’re considering an investment is whether business expertise and technical know-how of the founding team are in balance.
Even the most experienced angel investors and VCs can overlook red flags that are not immediately apparent.
I’ve heard pitches from many life science companies with deeply credentialed and innovative technical founders with absolutely no business expertise on the team. Conversely, I’ve seen companies filled with many superb business professionals that are deficient in their technical prowess. A founding team must always have relevant, gifted technical expertise to be viable.
Without a fine-tuned balance of business acumen and technical ingenuity, a startup may struggle to develop their game-changing product, bring it to market, scale the business and attract customers and investors.
Frequent staff turnover
Frequent and high turnover is often a red flag for investors as it usually indicates instability and internal conflicts within the founding team. Turnover disrupts the company’s operation, culture and growth trajectory. It’s a red flag that drama is consuming the company while its mission is mostly sidelined. A revolving door showing that the company can’t retain top talent will negatively impact its financial prospects, both short and longer term.
Instability in a founding team can show up in ego-driven abrasive management, favoritism and unfair compensation — issues and inequity that will cause people to leave.
Tweaks in leadership are normal and healthy as a company grows. But when these changes occur too frequently, investors should pay particular attention as it often suggests deeper issues in the business.