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What Are the Danger Signs a Startup Isn't Going to Work Out?
Let me share my list. It’s more about things I worry about after investing, as sometimes they're hard to see before:
Founders’ understanding of market doesn’t get deeper over time.
I really worry when 9–12 months later, the founders do not understand their market better. Especially, when they are a bit too arrogant about how they will kill the leaders -- when they don't really understand why they win.
Too slow to hire VPs.
Hiring is tough, but if 12 months have gone by and you haven’t added 2 strong senior execs to the team, I get worried. I worry if you can even recruit them at all. If you can’t — you will never scale. At least, you will struggle to scale. When others fly.
Too slow in general. Startups that are just too slow get eclipsed by the competition. No matter what else great they have going for them.
Excuses for misses. Often, again and again.
This is maybe the biggest flag. You will have rough months and quarters. Probably even a rough year or two. It’s a bummer, but it happens to us all. When the “excuses” come out, though … confidence goes out the door.
Surprises.
There’s no need for surprises at the investor / board level in SaaS. Let everyone know ahead of time. In SaaS, the revenue recurs. You’ll know when a big customer is at risk. When the burn rate may grow larger than plan. When the year plan is at risk. When a VP may not be the right one. The best CEOs telegraph these risks, without drama, but plainly and ahead of time.
Slowdown in transparency, especially during tougher times.
This is maybe the second biggest flag. When transparency slows down, especially in tough times, confidence goes out the door. Congrats on the great quarter. But not sending a prompt investor update when the next quarter is soft? That’s confidence-wrecking.
Lack of deep understanding of the competitive landscape.
You should get better and better at this. When I hear a CEO say a competitor is “imploding” — usually they aren’t. Sometimes, but usually not. The best CEOs are very respectful of their competitors. The best CEOs update you first on what the competition is doing well, and importantly. where they are adding competitive differentiation.
Manipulation and sociopathic behavior.
Yes, as CEO, you are selling up. That’s part of the job. But venture is a confidence game. Don’t sell a line, or a crock. Don’t spin a story that isn’t real — especially internally. Take the tough criticism, even and especially when you don’t want to hear it. When the going gets tough, the tough get going. The manipulative, by contrast, lash out.
Unable to Get Burn Rate Under Control.
This sometimes kills startups, sometimes it more maims them. Sometimes it leads to a premature exit. But one way or another, the best founders wrestle a too high burn rate into something manageable.
