New Year, New You & How to recognise red flags when joining a start-up

Impact Fundry
4 min readDec 30, 2022

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There are several red flags to consider when considering joining a pre-seed start-up as an employee or co-founder:

This article goes to those who are looking for a shift to help build rather than facilitate, we see you & understand your drive. However, you need to be careful, in the same way we as a VC do diligence on start-ups you must also do so on the company you may join.
This is a huge commitment between the financial considerations, emotional even for your health as a start-up is not ideal for a stress free life.

  1. Lack of a clear product idea or business plan: If the start-up doesn’t have a clear idea of what they want to build or sell, it may be a risk to join the company. Sometimes, start-ups are founded to solve a problem that either doesn’t exist, or is not large enough to justify its existence.
    You must be careful as this is very important for the health of the firm. All documentation has to be clear & yourself effectively pitched in this process. You can find a whole host of due diligence questions to ask a founder, including on this link here
  2. No or little traction: If the start-up hasn’t gained any traction or has very little traction, it may be difficult for the company to secure funding or gain customers. What is critical even at the pre-seed level is to look for partners for the firm, if the CEO has limited connections, limited check-ins with prospective companies it can be very difficult for the firm to develop into revenue or even iterate quickly as they have limited connections in industry.
    The simplest question is whether the co-founder has managed to get anywhere & what exactly do they need your support for?
  3. Weak or inexperienced leadership: If the leadership team is inexperienced or lacks the skills and knowledge necessary to run a successful start-up, it may be difficult for the company to achieve its goals. The chance of a firm building to a unicorn status grows exponentially with each company a founder has started on been in a growth stage as an employee. With this in mind, joining a first time founder can be a balancing act & a difficult one at that, especially when navigating a first time funding round. Angellist estimates that businesses that successfully raise a seed round will then have a 1/40 chance of becoming a unicorn. Reaching that stage requires experience, connections which may well be limited with a first time founder.
  4. Stubborn leadership:
    Start-up founders can be some of the most intelligent people in any room, they can also be direct, unwavering, demanding & unresponsive to feedback. As a founder, learning how to ask & answer questions will help to develop your ability to evaluate decisions, attitudes & employees. At the pre-seed level customer feedback is king & having a envisioned founder who is able to use this feedback is critical. If the founder doesn’t respond well to either criticism or due diligence it is likely they will not be able to deliver.
  5. Limited resources & accurate runway: Pre-seed start-ups often have limited resources, which can make it difficult for employees to do their jobs effectively. For example, you are extremely unlikely to be able to gain access to capital or expensive management tools & systems.
    This is important, as typically people can enter into start-ups from impressive firms but have no ability to build or iterate or even execute. This can massively slow down progress as there is much talk but little action. The second point is being entirely transparent on the state of the business, how long it can run & more or less what is exactly going on under the hood.
  6. High risk: Every pre-seed start-up is a high-risk venture, and there is a high probability that the company may not succeed. This means that there is a risk of losing your job and not getting a return on your investment of time and energy. At the pre-seed stage it is likely this will be the case, due to the cost of starting, CAC, limited funding & even burnout. It can take over 23 months on average to reach that seed stage of funding. This is a significant time & if you are not working FTE alongside this, you may well ruin your savings & potentially even your relationships. A start-up is for life not just for Christmas.

It’s important to carefully weigh the risks and potential rewards before joining a pre-seed start-up as an employee. It’s also a good idea to talk to current or former employees and ask about their experiences working at the company if you are able to.
We would also recommend that you know exactly what is the HR strategy, BD timeline for fundraising & when do you believe they will reach an initial PMF.

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