5 Red Flags Tech Investors Look for Before Funding a Startup

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Aquesta primavera va ser descoratjadora per als inversors tecnològics. The five largest technology stocks (Google, Amazon, Meta, Apple and Microsoft) lost more than $ 2.5 trillion in their valuations between January and the end of May, with equally large declines observed among technology startups across the world. levels.

The media is full of references to the bursting of the dot-com bubble, which does not help alleviate fears about the stability of the technology sector. When companies receive extremely high ratings, as has become commonplace for technology in recent decades, there is an increased risk of large fluctuations.

Experts agree that the current decline is a market correction of the overvaluations that occurred during the pandemic and not the harbinger of a full-blown accident. Overall demand within the technology sector was spurred by unprecedented “blockade” policies and the subsequent rise in technology adoption, leading to unsustainable growth projections that could not survive the end of the pandemic.

However, the fall in stock prices has pushed technology investors to the limit, and has inclined them to be more diligent than ever in assessing whether to invest in a technology startup. If you’re a startup looking for financing right now, here are five red signals that investors will look for, as well as tips on how to avoid any hesitation.

The definition of what constitutes a “solid” business plan for a technology startup has fundamentally changed. Previously, it was considered acceptable, even normal, for technology startups to drive aggressive growth strategies through the economy of negative units: regularly spending more on acquiring new customers than with them.

However, the collapse of high-profile startups like Casper Sleep has increased sensitivity to business models that seem to rely too heavily on the economy of negative units to grow their customer base. Market uncertainty has also raised expectations, as many investors demand that companies show signs of generating profits before they are willing to commit any capital.

To address this problem, startups should avoid overly ambitious growth plans and build their business model around financial stability and long-term profits.

Related: 13 red home flags to avoid

S’han acabat els dies d’assegurar el finançament en funció dels usuaris actius mensuals. Twitter’s struggles for profit have shown that the number of app downloads or platform users a company has is not directly related to long-term profitability.

Quan es tracta de startups, els ingressos van de la mà de l’escalabilitat empresarial. Several thousand downloads of a free app mean nothing if they don’t contribute to the end result. The approach should focus on showing a viable business plan with reach for multiple sources of revenue (the key word here is “revenue”), backed by financial data. Skipping finances and trying to use social media participation to increase valuation is a sure way to discourage potential investors.

3. Lack of business planning and unclear KPIs

Going hand in hand with the demand for financial data is the desire to see concrete KPIs rather than vague business projections. Investors want to know how a startup’s current capital will be spent and what it wants to achieve that expense, such as reaching a certain number of customers or developing a new revenue stream, and this key information is not on the slides of PowerPoint Templates

Startup leaders need to formulate clear, time-bound business plans and KPIs for which they are willing to be responsible, ensuring investors greater oversight of business progress. This increase in liability is beneficial for both startups and investors, as it helps manage the rate of combustion so that start-up capital can be stretched further, as well as avoiding some of the problems associated with premature growth of les startups, com ara els llançaments de productes excessivament dissenyats.

Related: Get the value of your money: what investors should look for in a startup

4. Lack of analysis of the market landscape

Is this technology already available on the market? Quant de temps trigaran els competidors a replicar una tecnologia similar? Do you have a strategy for distinguishing your startup from potential competitors, such as IP protections, licensing, and distribution relationships?

Investors will ask these obvious questions about any technology startup, so there is no excuse for not preparing detailed answers. Startups should complete a thorough analysis of the market landscape and use the findings to draft a sound business plan before approaching an investor. Without this turnkey information, attempts to engage potential sponsors will quickly end in disappointment.

As the WeWork debacle demonstrated, unexpected devaluations have the potential to throw everything off the rails, especially if a company is being mismanaged.

If your startup has a high rating, congratulations! However, be careful to assume that this valuation gives you an expense savings, falling into the trap of believing that the extra expense can be offset by securing a larger amount of funding. Investment rounds should not be used as a means to address existing debt and excessive spending.

Experienced investors know better than anyone that public market valuations can change, so startups should be wary of valuations based on external metrics. Instead, demonstrate the value of your business through a well-thought-out business plan and follow through, resisting the need to ensure an increase in short-term valuation without considering the consequences below.

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