VC red flags: Partners to avoid

I saw this post on LinkedIn by a seasoned entrepreneur, and it said:

“First-time co-founder, chasing VCs, investing 1000 hours in pitching, gets no value. Second-time founder, meets a VC once and stops pitching in order not to waste time and create value.”

This is so true. A lot of people enter our industry with dreams about “big money” investment, thinking they’ll get millions of dollars in one day and become rich. First of all, money raised is used for execution, not to enrich founders. Startup life is not really like that. Most startups don’t raise money at all (I believe 99% of them), most startups that try to raise funds from VCs fail to do so (also 99%, I believe), and most of those that manage to raise funds fail to execute properly (I believe 95% of them).

My comment on the post was, “Third-time founder scouted by VC, VC gets blocked.” He really liked it because every seasoned entrepreneur knows that this is actually the reality – “funny money,” as we call it in the industry, is not so useful for success.

My post, however, is about red flags – I’ve met so many clients, entrepreneurs, and investors in my life that I believe I can write a list of red flags that will save you some time and future pain. This list is not just about investors, but basically about anyone you may want to be dealing with in your startup – investors, clients, business partners, and of course, employees and contractors.

The 3 strikes rule

I adhere to a “3 strikes rule” when it comes to red flags. I watch carefully for signs of inefficiency, disorganization, or disrespect. If I encounter three significant issues, whether it’s with a VC or any other business relationship, I decide to stop working with them. For investors / VCs, if they hit three strikes, this means I tell them directly that I’m not interested in pursuing further engagement.

VC Red Flags

1. Extra-long application process: If they don’t understand that your time is valuable during the application process, they will waste your time afterward. I would skip any application process that takes more than 10 minutes to fill out the initial form.
2. Weird questions in application forms: If the application form includes more than a couple of strange questions, I would skip it. For example, one of the VCs that pitched me asked me to fill out a questionnaire of 50 “impact questions.” The questions were dumb diversity questions, like someone from an undergraduate psychology class decided to run a non-scientific survey. When I reached the fifth question, I closed the window and emailed them back that I wouldn’t waste my time on such a questionnaire.
3. Sporadic communication: If they are inconsistent with their communication, it can be a sign of disorganization or lack of interest. For example, if you get an answer to an email and then, after two weeks, you get a reply to your second email without an apology, I would mark it as my first red flag.
4. Overly detailed questions about your tech stack: It’s not the investor’s business which tech stack you use. If they put their nose in your tech stack now, they will try to micromanage you later. For example, if an investor asks, “Which tech stack are you using?” and you answer, “PHP on Apache,” and they respond with, “Oh, we don’t like PHP,” I would suggest that they are not good investors since (a) they probably do not understand tech (as they decide on a tech stack based on the title only, and not per application), and (b) they may be prone to excessive oversight or micromanagement at later stages.
5. Rude or arrogant behavior: Disrespectful behavior is a major red flag and suggests future difficulties in the relationship. For example, if they label you without justification (“You are not an AI person, right?”) or talk a lot about how good they are (“We are the best VC in the southern hemisphere”), I would see it as a red flag.
6. Unrealistic expectations: If they have expectations that are too high or not aligned with your business model, it can lead to conflict and disappointment down the line. For example, if an investor expects your startup to become profitable within an unreasonably short timeframe or claims that goals can be achieved with lower resources or faster than you anticipated, it may indicate a lack of understanding of your industry.
7. Long meetings & late to meetings: If meetings consistently run over time or if they are often late, it can be a sign of poor time management and lack of respect for your schedule. I have a “7 minutes rule” – if anyone is late for a meeting for more than 7 minutes without notice or without a really good excuse (for example, sickness or an accident), I don’t meet them again no matter who they are.
8. Unrealistic expectations regarding diversity and impact: If they have unattainable or misaligned expectations about diversity and social impact, I would say that you are dealing with problematic people. For example, if an investor demands immediate and significant diversity changes without understanding the current company culture or logistics, it can lead to unrealistic pressures.
9. Lack of flexibility with terms: If they provide a pile of pre-made agreements that have nothing to do with the values discussed in meetings, it indicates rigidity and potential future disagreements. For example, I had two incidents with the same Australian VC, after which I declined to work with them. The first incident was that in one meeting, the VC partner talked in circles without relating to the draft shareholder agreement I initially received. When I asked, “Can we speak about the terms?” the guy said, “No, you take it or leave it.” The second incident was when they sent me a private guarantee of $250,000 to sign before their investment committee, even though nothing was guaranteed from that IC. I never sign private guarantees, so I basically told them to look for someone else to invest with.
10. Oppressive/exploitative terms: Terms that are overly restrictive or controlling can stifle your business’s growth and autonomy and are a red flag – obviously. If you feel cornered, you probably want to opt out.

Good luck 🙂

Eran