10 Sure-Signs of Startups that are Bad Investment

Knowing in which startup to invest is the key in venture capital investing. But how is one to know where or in whom to invest? This obvious-looking question rarely has any obvious answer. In the following ten points, U. Mahesh Prabhu presents clear and definitive pointers to identify startups that are bad investments:

  1. 1. Emotional Instability & Lack of Clarity

Decisions are crucial to sound and sustainable profitability. And since outcomes of decisions are hard to determine, one must remain intellectually flexible to do course corrections. Intellectual flexibility is a mirage in the presence of emotional instability. Emotional instability is also owing to a lack of clarity. Therefore, it is natural to conclude that any startup founders or leadership with significant emotional instability or lack of clarity are bad investments. And while short-term profitability may as well be possible, such investing is in fact gambling.

 

  1. 2. Excessive Self-obsession and Vanity

Self-obsession, if not narcissism, is a sign of an untamed and unstable mind. Vanity is yearning for appreciation and accolades from people due to over-estimation of the self. Investments are always in business, but when the leaders of such businesses are obsessed with vanity, including awards, rewards, excessive media, and social media coverage, any investor must be alarmed. If you carefully observe, all the great companies that go burst often tend to have such excessive vanity tendencies in their leaderships. The focus of leadership is critical in all businesses. Still, when leadership is obsessed with its image and diverts its organization’s resources to boost or manipulate the image of the self, it is a clear sign of an investment going south.

 

  1. 3. Repeated Unquantifiable Claims Coupled with Self-boasting

In recent times it has become a norm for companies with little, no, and even negative profitability to claim great “valuation” through a process called financial engineering (one that is often bordering on financial manipulation). More than often, such organizations seek to expand rapidly in multiple dimensions in the hope of greater profitability through debts. In an age where most investments are with impulsiveness rather than calculations, such tactics tend to impact detrimentally. A lot of people do tend to fall for such stories furthering the stock prices. Nevertheless, blindly investing in such startups without insights is a recipe for disaster. The infamous financial crisis of 2008 incurred principally because most investors failed to care for understanding the definition of complicated jargon like “subprime loans” before considering to invest in “toxic equities.” When there are tall claims without substantiation, it is a clear indication of a bad investment. When a leader of any organization makes boastful claims on their credibility when asked questions about their decisions, it indicates an irrational behavior with clear and present danger for any investments.

 

  1. 4. Focus on the Future Without a Grip on the Present

A sizable number of companies often addressed as “most valuable companies in the world” barely have a product or service with substantial profitability. Given this, it must be fascinating to observe why not many thinkers ask intelligent questions about how a company can, without any product or service to generate adequate revenues – let alone profitability – can make such tall claims. How can those without any substantial past in their offering domain make extravagant claims about the future? While our present is owing to our past actions, the future is owing to our actions in the present. Given this logic, is it fair to blindly believe in companies selling us their stock, product, or service in the future without any credibility in the present?

 

  1. 5. Unwarranted Demands Without Any Promise of Delivery

When organizations make unwarranted demands for money at regular intervals from their investors without delivering any quantitative results with investment in the past – it a sign of concern. And yet, we do see such things often happening with “large valuations” startups that tend to “raise money” (read debt) from investors from time to time in the name of “series funding.” Most of the funding is often without any substantial addition of value to a product or service that such startups claim to “revolutionize.” Organizations that become experts at raising debts can barely be trusted to deliver profits anytime sooner and therefore are liability and never a sound investment.

 

  1. 6. Obsession for shortcuts and quick fixes

Shortcuts and quick fixes are the curses of the present generation. Seeking to incur more debts in the name of “round funding” instead of creating products or services that could generate revenues – albeit modest – can seldom be a good sign. It is but evident that an organization that is not creating wealth is incurring debt. And debt-creating organizations can barely be profitable; this remains true irrespective of the “modern wisdom” offered by media claiming over the roof valuation or lavish lifestyle of people running organizations incurring debts instead of repaying them.

 

  1. 7. Fixation on Valuation Instead of Value Creation

Value is the price of a product or service in the present; Valuation, on the contrary, is a different ball game. Value is tangible; valuation is not. Therefore, any entrepreneur fixated on valuation can seldom be trusted to create value. They are also a no-go for investing.

 

  1. 8. Disproportionate and Ever-increasing Debt

While debts at agreeable limits (say 20-30% of net revenues) are acceptable, disproportionate debts exceeding 50% of the organizations’ revenues are a clear sign of caution. While most startups these days tend to raise more debt at multiple rounds of investing to unburden the previous debts, many such debt-funding startups do tend to collapse eventually. While the rise of such debt-driven startups is vividly made public across the media, their failures are barely made public. Any organization with excessive and ever-increasing debt must be in the category of a bad investment.

 

  1. 9. Absence of dignity and respect for people

We live in an era of knowledge and skills; these two quintessential things come from people. And while there are great talks about Artificial Intelligence (AIs), any sensible investor can tell you the importance of quality people in building high-tech businesses including AIs. While pay does play a role in attracting talents, retaining them by pay alone has often proved inadequate. Most studies confirm that people chose to move away from an organization that fails to offer them dignity and respect; this is truer with people with rare skill sets. Therefore, startups with poor or abysmal records in offering dignity and respect to their employees are bad investments.

 

  1. 10. Lack of knowledge

To stake a claim to success without knowledge in an economy driven by knowledge, is ludicrous. Entrepreneurs who make tall claims with poor understanding of their domain knowledge; or, worse, extreme prediction of the future without offering substantial knowledge and reason for extreme predictions can seldom be sensible. Lack of knowledge is often proportionate to lack of sensibilities, and lack of sensibilities is seldom a healthy sign for investing.

Leave a Reply

Sukham & Duhkham: The Vedic Philosophy on Happiness and Sorrow

We are all born into this body without possessing anything. All that we gain is after the birth of this body. We are also sure to die, after which all that we have accumulated and achieved must be left behind. So, we are neither born nor do we die possessing anything. More like a computer game. Given this why should we fear anything? Why not accept everything as a game and appreciate everything life delivers unto us? Neither pleasure nor pain is lasting. They all have an expiry date. Only those with wisdom live beyond pain and pleasure, happiness and unhappiness into a state of perpetual bliss.

Read More »

Sannyasa: The True Meaning

Vedic Sanskrit word सन्यासं (Sanyasa) is made of two words, namely: सत् or Truth and न्यास् or Living. Sanyasi, “a person living in Truth,” is one who is full of unconditional LOVE & without a shred of HATE. A true Sanyasi never disown anyone; on the contrary accepts everyone as one’s own – without any EXPECTATIONS. Realizing that ATTACHMENT is the reason for pain; they live in BLISS at all time; be they alone or in company of people.

Read More »

Ahimsa: A Vedic Perspective

Dharma is not doing to others what you don’t like being done by someone else to you. Dharma is that which sustains the order in self (mind), family, society, nation and the world at large. Dharma is sustained by doing things where the strong don’t thrive by suppressing the weak and the weak are not subjugated by the strong. Dharma provides a way for people to live and let live. When there’s an imposition of someone else’s will on you or your own excesses on others, that’s Himsa, causing Adharma.

Read More »

What is Kootaneeti? Why is it Important?

There are times to fight, there are also times for retreat. We need not win all the battles in life. Some battles make us strong some teach us valuable lessons. To try and win all battles is vain; but to try and win losing battles is stupidity. Long before we can win, we must gracefully learn from our defeats. To make it worse, we neither considers patience nor perseverance a virtue; most see them as “vice.” The modern definition of success, the ones that are propagated by our business schools, the media organizations, and societies is clearly flawed. Success is not when we receive some award or when some magazine puts us on its cover, or a filmmaker decides to make a biopic. The Vedic idea of success is best explained by Krishna:

Read More »

Tantra, Mantra, Rajaneeti & Kootaneeti: Unmistakable Connection

Mantra and Tantra were regarded by Kautilya as two crucial elements in the art and science of Vedic approach to politics – Rajaneeti. Without a plan and a strategy to execute it Shakti (read Power) is of no use. In Arthashastra, he declares “Power by itself is useless” and that “Person who seeks power without sound Mantra (objective) and Tantra (strategy) is verily consumed by it.”

Read More »

entertain > educate > enlighten>

Vedic Management Center Initiatives

Education: Training, Courses, Mentoring

Learn about our continuing and online course connecting Vedic knowledge with contemporary situations including mind, body, management, leadership, politics and diplomacy.

Our Publications: Books & eBooks

We've published over 6 books in hardbound, paperback and eBook format. Audio formats of our books are underway already along with graphic novels and comics.

The Kautilya Project

A unique Vedic Management Centre Initiative specially devised to rekindle the lost art and science of Vedic leadership for management, politics, and diplomacy.

The Vedic Counseling

A transformative counseling model built on time-tested knowledge & wisdom by U. Mahesh Prabhu to assist leaders to attain a balanced state of mind even under significant stress

Over 15,000 copies sold! Order your copy today! 

The Fundamentals of Kootaneeti: The Vedic Art of Strategic Living 

by U. Mahesh Prabhu with Dr David Frawley | Pages 320 | Format: Hardbound & eBook | Price $29 INR 500 | 

Layer 1
This Vedic Management Center uses cookies and asks for your personal data to enhance your browsing experience.