How does a venture capitalist typically find the red flags of not investing in a startup? This is a common question that gets asked by many Hong Kong startup business entrepreneurs before they get to point where their companies need constant funding from an angel investor or a few investors.
It does not matter how passionate you are into an industry. When the startup founder (i.e. you) has no prior working experience in a specific industry but is trying to dive into the industry as a startup company, the chance of failing badly is extremely high. In Hong Kong, there are many industries where people and owners have worked in for more than 20 years or 30 years. This is experience that you cannot simply replicate in a short time. This is the first sign (or red flag) for a decent investor to back off.
Hopefully, the founder is not just a person recently graduated from school or college. An even worse case is that the founder is still studying in school or college. There are however some exceptions in real life, but serious persons would never bet big on such case. Do not mix studying and work.
Being able to tell a decent story is important. The founder and his mates (i.e. co-founders or partners) must not sound like they got drunk on night at a bar nearby and simply decided harshly that they disliked their current jobs. The outcome which has been derived from this situation is to go through a business setup. This is most probably going to end up a bad choice.
The founder and his team should better be able to tell (or explain to) you right away what their product (or main product) is about. When they muddle and struggle to explain, it means they still aren’t sure of what they are developing. Without a clear product, the target market will also be vague. Based on this, it is really difficult to even build a connection between a potential customer and the product.
Teamwork: Does it all look like a team to you?
Geographical location matters. You should not simply set up a shell business in Hong Kong, and outsource all the operations to elsewhere from Philippines to India, or from Russia to Ukraine. This setup does not give much confidence to many typical VCs. The exception is that you can prove them with this setup you can produce extraordinary results. But it rarely happens.
Leveraging from a local funding scheme
As a company operating mainly from Hong Kong, you can always apply for TVP funding (i.e. Technology Voucher Programme), depending on the nature and industry of your business. The main aim of this funding scheme is to give your business a financial subsidy in projects that are highly involved with technologies. The technology you have chosen does not have to be very high standard such as rocket science or big data science.