6 red flags VCs look for in a proposed startup budget

Photo credit: Eric Bailey

Launching a startup requires herculean effort and focus. And, love it or hate it, money is an absolute necessity. Whether you pitch to a venture capital (VC) firm to raise the necessary capital, or work to self-fund your dream, is up to you. Both paths have real value.

If you’re looking for funding from a VC firm, however, here are 6 things to avoid.

Excessive founder salaries and bonuses

If you thought launching a company by using someone else’s money translates to lucrative salaries and bonuses for the founding partners, guess again.

The vast majority of venture capital firms will ignore a pitch if they look at the cashflow and find an item for founder salaries and perks. The founders usually earn their equity by initially donating their efforts to the startup. This is meant to counterbalance the capital that other equity partners bring into the business.

The last thing your fledgling startup needs is the burden of providing the founding partners with a salary.

According to an article on Inc.com, most VCs will entertain a salary of US$50,000-75,000 for early-stage entrepreneurs. This would apply to the operating partners—the people with the skills, expertise, and drive to show up full-time to make the business a success.

Large technology costs

Creating a splash with an impressive website and a snazzy digital PR strategy could be a good idea, but don’t expect a VC firm to foot the bill. Technology can be a drain when it comes to startup costs. I’ve personally witnessed startup expenses quadruple as a result of constant revisions and bug fixes.

In the early stages, take advantage of the various do-it-yourself web design platforms available on the market. A website can be built, even by a novice user, in a matter of days with the online services available.

Forget hiring a design team and a web developer. Show VCs you’re serious about pinching pennies and maximizing the bang for their buck by highlighting your use of low-cost, high-value tech solutions.

Excessive consultancy fees

On one pitch I consulted on, the founder was a recent college graduate with very little background in technology, or anything else outside of education. He felt that the theories he learned in school could provide him the necessary tools to launch a strong business.

Why would a VC back your venture if you lack the basic skills to build your proposed product?

His solution for his lack of technical skills and real-world experience was to bring agencies and consultants onboard. The proposed startup would build an app for mobile devices that would allow users to arrange their photos in a collage, and turn them into wallpapers, mousepads, etc.

In his cashflow, he had budgeted US$400,000 to cover the costs of developing technology and creating a back-end system.

Paying back previous investors

Not understanding key assumptions

Forgetting an exit strategy