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Australian Startup Investor Red Flags for Founders

Writer's picture: Warwick DonaldsonWarwick Donaldson

A few weeks ago I wrote about qualifying investors and I want to expand on the topic by discussing investor red flags founders should look out for.


When evaluating investors, it’s important to remember that red flags don’t automatically mean guilt or malicious intent. Rather, they should prompt you to think more critically and dig deeper into your potential investor’s motives, experience, and practices. In some cases, these behaviours stem from inexperience or misalignment rather than intentional harm.


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Choosing the right investor isn’t always just about securing capital—it’s about partnering with someone who shares your vision, understands your industry, and can help grow your business in a way that aligns with your long-term goals.


A poorly aligned investor can stifle growth, lead to conflicts, or even derail your startup's trajectory. The right investor, on the other hand, will be a strategic partner, helping you navigate the complexities of scaling while providing guidance, mentorship, and resources beyond just money.


 

Investor Red Flags


🚩 1. Early Push for ASX Listing

  • Why It’s a Red Flag: Premature IPO pressure misaligns with long-term goals, leading to rushed growth.

  • Solution: Be clear about your growth timeline and push back on premature public listings.


🚩 2. No Relevant Sector Expertise

  • Why It’s a Red Flag: Investors unfamiliar with your industry may not fully grasp its challenges and timelines.

  • Solution: Seek investors with proven experience and a network in your industry or be clear about the complexities and timelines to ensure alignment.


🚩 3. Bait and Switch

  • Why It’s a Red Flag: Shows opportunism, lack of commitment, and potentially unethical practices for financial gain.

  • Solution: Stick to investors genuinely interested in financially supporting your business.


🚩 4. Overly Controlling Terms

  • Why It’s a Red Flag: Demanding excessive board control or veto power stifles your ability to run the company.

  • Solution: Ensure control remains balanced and maintain decision-making power over key areas.


🚩 5. Pushing for Short-Term Exits

  • Why It’s a Red Flag: Prioritising fast returns over sustainable growth can harm long-term success.

  • Solution: Align on long-term growth timelines and ensure investors understand your vision.


🚩 6. Unrealistic Revenue Targets

  • Why It’s a Red Flag: Imposing unattainable growth expectations strains operations and decision-making.

  • Solution: Push for realistic targets that align with your growth stage.


 

Want more Aussie founder cap raising content?

Check out some of my other articles on fundraising..


 

🚩 7. Underestimating Regulatory Hurdles

  • Why It’s a Red Flag: In sectors like MedTech, non-compliance can lead to legal issues or delays.

  • Solution: Choose investors who understand regulatory requirements or are willing to learn quickly.


🚩 8. Demand for Personal Guarantees

  • Why It’s a Red Flag: Adds unnecessary personal financial risk to the founder.

  • Solution: Avoid completely.


🚩 9. Seemingly Evasive During Due Diligence

  • Why It’s a Red Flag: As a founder, you have a duty to conduct due diligence on investors, and they should respect this.

  • Solution: Be clear that transparency is critical, and insist on thorough information exchange.


🚩 10. Be clear that transparency is critical, and insist on thorough information exchange.

  • Why It’s a Red Flag: If an investor refuses to provide this certificate, they may not be eligible to invest.

  • Solution: Insist on receiving a compliant certificate that meets ASIC’s requirements here.


🚩 11. Treating Other Investors Poorly

  • Why It’s a Red Flag: Disrespecting other investors signals a lack of respect for contributions past, present, and future.

  • Solution: Speak with other founders or stakeholders to understand their experience with the investor.


🚩 12. Trying to Buy Too Much of Your Company

  • Why It’s a Red Flag: An excessive equity stake could result in a broken cap table and make your company uninvestible in future rounds.

  • Solution: Ensure equity distributions align with market standards and leave room for future investors.


🚩 13. Lying

  • Why It’s a Red Flag: Any form of dishonesty is a dealbreaker.

  • Solution: End discussions immediately if you detect falsehoods or inconsistencies.


🚩 14. Unrealistic Expectations

  • Why It’s a Red Flag: Expecting timelines or milestones that aren’t achievable adds undue pressure.

  • Solution: Align expectations early and ensure realistic growth targets.


🚩 15. Lack of Commitment

  • Why It’s a Red Flag: Investors who show little commitment may abandon you when challenges arise.

  • Solution: Look for investors who are willing to commit long-term, not just for financial gain.


🚩 16. Stalling

  • Why It’s a Red Flag: This could indicate indecision, lack of seriousness, or worse.

  • Solution: Set clear reasonable timelines and move on if they fail to respect them.


🚩 17. Conflicts of Interest

  • Why It’s a Red Flag: An investor with significant interests in competitors or related industries may pose risks for intellectual property and confidentiality.

  • Solution: Ask early on if the investor has conflicts of interest and evaluate how they could impact your business.


 

Final Thought


Investor red flags vary depending on the type of investor and their investment size or involvement. Conduct your own due diligence, and ensure alignment with your startup’s vision and long-term goals so that you build successful, lasting investor partnerships. Stay vigilant!


 

Disclaimer: Excentricity Pty Ltd, trading as CapXcentric (ABN 42 679 978 959, AFS Representative No. 001311296) is a Corporate Authorised Representative of True Oak Investments Pty Ltd (ABN 81 002558 956, AFSL 238184). The information provided in this article is intended for companies and startups and is not directed towards investors. Any statements or representations are general information only and do not take into account your personal objectives, financial situation or needs. Readers are advised to have regard to their own circumstances and consider seeking specific advice from a professional adviser before making any business decisions. No representations are made as to the accuracy, completeness, or reliability of any information provided in this article. Readers use the information provided at their own risk.

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Excentricity Pty Ltd, trading as CapXcentric (ABN 42 679 978 959, AFS Representative No. 001311296) is a Corporate Authorised Representative of True Oak Investments Pty Ltd (ABN 81 002558 956, AFSL 238184). Any information about the financial products and financial services available from or through CapXcentric on this website is general information only and does not take into account your personal objectives, financial situation or needs. Please have regard to your own circumstances and consider seeking specific advice from your professional advisers. 

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