What happens when you think you’ve found a solid investment, only to uncover underlying red flags during due diligence? Unfortunately, some company metrics or projections won’t withstand the scrutiny of an experienced investor.
The problem is that founders are often overly focused on telling the “brand story.” The goal is to spark interest and move toward commitment from an emotional standpoint. The reality is that, at times, the numbers get blurred to fit those narratives. While most omissions are not malicious in nature, they can signal weaknesses and undermine the investor-founder trust that is critical to managing risk and cultivating a future partnership.
Analysts at Zubr Capital frequently conduct research that delves deeper into a potential company's structure and overall health. Below are some of the more common issues identified during that research that founders may attempt to gloss over or overlook.
1. Feeding the Monster
Bad unit economics, or feeding the monster by consuming endless capital, occurs when expenses are excluded from reports or when revenue from “future services” is relied on for final numbers. Hard data is crucial to ensuring a potential investor has clear visibility into the revenue, cost, and structure needed to grow, including the cost of acquiring and serving a single customer. That balance between CAC and LTV is how you know the company’s “business engine” is functioning effectively and ready to move forward.
The moment you dig into cohort analysis or monthly P&L reviews, the truth usually surfaces that the full picture hasn’t been considered. Maybe some paid advertising is overlooked, or fulfillment expenses tell a different story about retention and churn. A solid founder will provide this data and put it into context. These founders tend to inspire confidence because they want to build investor trust, even when margins aren’t as strong as you might want them to be.
2. Hit to the Bottom Line
Losing whales (big clients) signals elevated churn. It is a direct hit to an investment’s bottom line, often indicating that there may be a retention issue worth exploring further. Any hidden client lists or notes that indicate a significant portion of early revenue is on the “chopping block” tend to be red flags during due diligence.
The result is that some founders will rush to secure a new whale to fill the missing revenue gap. Any good investor will look at the most valuable clients and may schedule a meeting to discuss the business with those whales (known as “customer reference calls”).
The goal is to ensure revenue stability. A lost government contract or the sudden departure of two or three major customers might point to poor customer satisfaction. This can signal higher churn and deferred revenue, leading to a spike in accounts receivable.
3. Hidden Debt
A founder who seeks to conceal a company's actual debt is often viewed as a red flag. Debts to early investors or repayments of initial seeding should be considered before capital reinvestment. That includes obligations such as a 10% repayment to an investment advisor, bridge loans, deferred payments, or anything else omitted from a pitch deck.
There is little practical justification for hiding these debts. They will come out during due diligence, and it often makes more sense for a founder to present a complete and transparent view of such concerns. Being upfront with information gives investors a better understanding of what needs to be overcome. As long as the business engine, service, or product remains valuable, it can be viewed as a manageable risk, rather than a hidden liability that surfaces during funding and raises questions about the founder’s experience or judgment.
4. Leadership Team Friction
When there is strategic misalignment or dysfunction between founders and the C-level team, it introduces a meaningful risk. One way to assess this is to see whether any executives left during previous funding rounds. In some cases, this may suggest that leadership cohesion weakened after initial funding, or that internal tensions made long-term collaboration difficult.
Investors can find this information through industry journals, employee references, or news reports. Team loyalty might not be one of the first considerations in a potential investment, but it can quickly reveal how excessive friction within leadership can undermine the business engine.
When qualified, experienced, and motivated leaders leave a company, they take institutional knowledge and insider expertise with them. This can affect morale and productivity. Investors generally want to assess the “whole” company, not just individual puzzle pieces.
5. Risk of a “Broken” Cap Table
A messy cap table often stems from an overly complex, legally risky, or misaligned ownership structure. Some founders might look to simplify that structure during a pitch, overlooking whether hidden or undocumented shares or uneven distributions exist. Without a fair and balanced view of who owns or holds a stake in a business, the underlying financial relationships can remain unclear.
While this isn’t necessarily a deal-breaker, it does speak to trust. Plenty of law firms operate solely to uncover the full cap table for a potential investment, unearthing old agreements or cross-checking to ensure there are no regulatory or legal issues with ownership. The earlier these conflicts are brought to light, the less risky the investment becomes. Ideally, cap table issues are resolved before, during, and after funding.
The Lesson of True Founder Transparency
The underlying point of all these factors that founders forget to include is that they can undermine trust with potential investors. Good investing involves risk management. Without transparency, it’s hard to believe in a company, no matter how strong the storyline might be.
Investors look at everything, not just the current business model. The character of leadership and the integrity of the founder play a central role in building the trust that VCs need to invest. That trust factor is often described as being highly valuable. It can demonstrate maturity when a founder is willing to address weaknesses while placing them in context alongside the company’s strengths.
The question then becomes why a founder might choose to manipulate data or conceal potential risk. Such issues are likely to surface during due diligence anyway. In practice, it often makes more sense for a founder to be upfront and willing to engage openly with VCs from the beginning. While this approach may extend the funding process, it supports long-term growth and a willingness to tackle challenges directly. That level of maturity tends to stand out, regardless of industry or stage of company growth.
