The Red Flags That Should Stop You in Your Tracks
Due diligence isn't just about confirming the bull case—it's about finding the reasons to say no. The best associates develop a sixth sense for red flags. Here's the comprehensive checklist built from hard-won experience.
Founder Red Flags
- Inconsistent narratives — The story changes depending on who they're talking to. Compare what they told you vs. what references say vs. what's in the data room.
- Reluctance to share data — "We'll get that to you next week" repeatedly. Founders who are proud of their metrics share them eagerly.
- Can't articulate why they'll win — If the founder can't clearly explain their competitive advantage, they probably don't have one.
- Previous company history that doesn't add up — Gaps in the timeline, vague descriptions of what went wrong, or former co-founders who won't return calls.
- Disrespectful about competitors — Dismissing competitors as "irrelevant" or "stupid" signals either arrogance or wilful ignorance.
Metrics Red Flags
- Vanity metrics front and centre — Highlighting registered users instead of active users, GMV instead of revenue, "pipeline" instead of closed deals.
- Cohort data that doesn't exist — If they can't show you retention by cohort, they don't understand their business well enough.
- Revenue concentration — If one customer accounts for >30% of revenue, that's not a scalable business—it's a consulting engagement.
- Burn multiple above 3x — Spending £3+ to generate £1 of new ARR is unsustainable unless there's a clear path to efficiency.
- Growth rate that relies on a single channel — All growth from one paid channel or one partnership is fragile.
Use Predict Ventures to benchmark these metrics objectively. When a founder tells you their retention is "great," you need to know if it's actually above or below median for their stage and sector.
Market Red Flags
- Declining TAM — The market is shrinking, being disrupted, or commoditising
- Regulatory overhang — Pending regulations that could fundamentally change the business model
- Winner-take-all dynamics with an established winner — If Salesforce already owns this category, you need a compelling disruption story
- No clear buyer — If you can't identify who writes the cheque and why, the market might not exist
Legal and Structural Red Flags
- Messy cap table — Too many small investors, unusual preference stacks, or founder shares that are almost fully diluted
- IP issues — Code developed at a previous employer, open-source licensing conflicts, or missing IP assignment agreements
- Outstanding litigation — Any active lawsuits, especially from former co-founders or employees
- Complex corporate structure — Multiple entities in different jurisdictions without a clear business reason
Deal Dynamic Red Flags
- Artificial urgency — "We're closing in 48 hours" with no credible competing term sheet
- No other institutional investors interested — If you're the only firm at the table, ask why
- Valuation disconnected from metrics — A £50M pre-money with £200K ARR needs an extraordinary justification
- Unusual terms — Participating preferred with 3x liquidation preference, full ratchet anti-dilution, or super pro-rata rights for existing investors
The Meta Red Flag
The biggest red flag of all: when you find yourself rationalising away concerns. "The retention isn't great, but..." "The founder was evasive, but..." If you're making excuses during diligence, imagine making them to your partners when the investment goes wrong.
Trust the data. Trust the pattern. Document everything.
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