One of the key advantages of Afford.Capital is a strict entry filter in the startup funnel and our own scoring system, thanks to which we select promising projects at an early stage.
Our scoring is 3 stages, 220+ parameters of selection, and 2 investment committees. So we review 5000 projects a year, selecting the top 1%: the most promising, solid, credible, with a strong team, track record, and a working business model;
Naturally, when we filter out the 99% of startups as not suitable, we deduce certain patterns, signals, and red flags by which we identify a project as unreliable. If you see such a red flag, you should be wary and carefully double-check all the information about the project, and then perhaps give up the idea of investing in it altogether.
Over the past month, we have been actively sharing scoring activities and even showing excerpts from investment committees. Investors have been more active in asking about "red flags" - and this interest has translated into the material you are reading now.
Our scoring is 3 stages, 220+ parameters of selection, and 2 investment committees. So we review 5000 projects a year, selecting the top 1%: the most promising, solid, credible, with a strong team, track record, and a working business model;
Naturally, when we filter out the 99% of startups as not suitable, we deduce certain patterns, signals, and red flags by which we identify a project as unreliable. If you see such a red flag, you should be wary and carefully double-check all the information about the project, and then perhaps give up the idea of investing in it altogether.
Over the past month, we have been actively sharing scoring activities and even showing excerpts from investment committees. Investors have been more active in asking about "red flags" - and this interest has translated into the material you are reading now.
🚩 The funder/team already had projects, and all of them were created in the same way as the current startup in all respects
So, Red Flags, or stop signs when scoring a startup.
🚩 The funder/team already had projects, and all of them were created in the same way as the current startup in all respects
The experience is good.
Experience from which conclusions are drawn - super.
A blanket, a template for which the same type of scam projects are riveted - awful.
Analyzing 5,000 projects a year, we regularly encounter this type of scam. Its essence is that teams serially create the same type of projects with the same scheme of attracting investors, collecting money, and "exiting", after which the project is left with nothing.
How to recognize this type of scam:
The website, social media, and project packaging materials are made to replicate previous ones launched by this team
The same model, but a different product. The most understandable example is the networking business. No matter what you sell: mops, food supplements, or info products, the model of MLM business remains the same, it is obvious and recognizable
The product, structure, and traction are the same, with only a small detail changes. For example, we have cut down the startup that failed to launch L1, promptly "reshaped" and is now gathering investments for the launch of L0. Everything remains the same, only the level of complexity of the implemented concept has changed
Experience from which conclusions are drawn - super.
A blanket, a template for which the same type of scam projects are riveted - awful.
Analyzing 5,000 projects a year, we regularly encounter this type of scam. Its essence is that teams serially create the same type of projects with the same scheme of attracting investors, collecting money, and "exiting", after which the project is left with nothing.
How to recognize this type of scam:
The website, social media, and project packaging materials are made to replicate previous ones launched by this team
The same model, but a different product. The most understandable example is the networking business. No matter what you sell: mops, food supplements, or info products, the model of MLM business remains the same, it is obvious and recognizable
The product, structure, and traction are the same, with only a small detail changes. For example, we have cut down the startup that failed to launch L1, promptly "reshaped" and is now gathering investments for the launch of L0. Everything remains the same, only the level of complexity of the implemented concept has changed
🚩 The project already had a progenitor, but its fate is unclear
Let's be clear at the startup: pivoting is NOT a bad thing. Moreover, it's a common story for real startups developing and working to find their product market fit.
It's bad when the progenitor project is phased out and its fate is unclear. This creates a gap, a white noise in the startup's traction that raises perfectly reasonable questions:
why did the project launch fail?
how did it end?
were the investors on board?
if so, what happened to their investment? If the project made a pivot, was there a transformation of arrangements? For example, token swaps.
Have all the points been sorted out?
If there are no intelligible answers, that's another reason to be wary. Crypto projects are still weakly regulated. What's stopping the creators of a new startup from walking off into the sunset again with your money?
It's bad when the progenitor project is phased out and its fate is unclear. This creates a gap, a white noise in the startup's traction that raises perfectly reasonable questions:
why did the project launch fail?
how did it end?
were the investors on board?
if so, what happened to their investment? If the project made a pivot, was there a transformation of arrangements? For example, token swaps.
Have all the points been sorted out?
If there are no intelligible answers, that's another reason to be wary. Crypto projects are still weakly regulated. What's stopping the creators of a new startup from walking off into the sunset again with your money?
🚩 The Roadmap has no specific timeline for the actual launch of the project
It seems obvious, but few people pay attention to it. Often the project Roadmap is full of beautiful plans and milestones: launch of marketing, PR, participation in hackathons, team expansion, software development... but the actual launch of the product is kind of forgotten.
This is a +1 signal that the startup is unreliable. When analyzing the Roadmap, first look for the actual launch date, and then analyze everything else.
This is a +1 signal that the startup is unreliable. When analyzing the Roadmap, first look for the actual launch date, and then analyze everything else.
🚩 No Token Utility
Tokenomics is not an easy concept. To understand the base (not to mention all the subtleties), you have to devote time to it.
A project token always exists for a specific purpose. A token must have self-value - something for which users will buy and then hold tokens, rather than pouring them into a cup.
If a project does not have Token Utility, but the token has already been released to the market, suspicion should arise. Don't the founders just want to raise money on Token Sale by selling air and then disappear?
A project token always exists for a specific purpose. A token must have self-value - something for which users will buy and then hold tokens, rather than pouring them into a cup.
If a project does not have Token Utility, but the token has already been released to the market, suspicion should arise. Don't the founders just want to raise money on Token Sale by selling air and then disappear?
🚩 Project tokens have few holders
If you are analyzing a crypto project and it already has a running token, use the Etherscan service to check the number of holders.
If a project's tokens have too few holders, that's a reason for an in-depth analysis.
In our practice over the past 2 weeks, we have seen projects that talk about a full-scale launch, but the tokens are concentrated in just a few wallets, and most likely in the hands of the founders. Such a project may be scammy. The price of a token in such a scenario is easy to manipulate. Not to mention the fact that the project has no real investors on board.
If a project's tokens have too few holders, that's a reason for an in-depth analysis.
In our practice over the past 2 weeks, we have seen projects that talk about a full-scale launch, but the tokens are concentrated in just a few wallets, and most likely in the hands of the founders. Such a project may be scammy. The price of a token in such a scenario is easy to manipulate. Not to mention the fact that the project has no real investors on board.
🚩 The startup does not fully respond to your scoring questions
Each of you will have a different list of questions for the project. We have 48 of them at the first stage of contact only. And when a project refuses to answer some of the questions, it promptly loses points and its chances of making it to the second stage of verification.
For example, questions are raised by:
For example, questions are raised by:
- Absence of an organizational structure
- lack of information about the team
- refusal to provide links to key files - whitepaper, tokenomics, PitchDeck
🚩 The project claims a large team, but cannot show anyone but the founders
A strong team is the pride of a startup and the driving force behind it. Speaking of the importance of the team, we like to remember the story of Airbnb. The idea and pitch deck of the project did not inspire investors in one of the first rounds of fundraising. But the investors liked the team: thoughtful organizational structure, experienced pros with relevant experience who clearly knew what they were doing. Airbnb got invested because of the team - and became a $57.4 billion unicorn company by 2022.
Meanwhile, projects at the scoring stage often claim a large team of strong specialists but show only 2-3 people, the founders. This is alarming and raises questions.
Meanwhile, projects at the scoring stage often claim a large team of strong specialists but show only 2-3 people, the founders. This is alarming and raises questions.
🚩 Key documents of the project are not elaborated
This is all relative and depends on the stage. In the Pre-Seed round, when FFF (Family, Friends, Fools) funds are raised, the project may not have coolly packaged documents.
But at the stage of raising investment from foundations and boutiques, communications with business angels and VCs should already be at least well-established:
For a full list of files, a startup should have, pick up our guide to scoring projects.
But at the stage of raising investment from foundations and boutiques, communications with business angels and VCs should already be at least well-established:
- Pitch Deck
- Whitepaper
- Financial model
- Roadmap
For a full list of files, a startup should have, pick up our guide to scoring projects.
🚩 Clearly inadequate P&L
P&L (Profit and loss statement), or PNL, is a report that shows the company's profits and losses for a certain period. For startups, these profits and losses are often predictable, which does not negate the importance of the document.
At first glance, this document may seem impossible to understand without an analyst but take your time. Take a closer look at the current figures and try to think logically. If you have direct contact with the startup, ask questions and clarify.
In the last two weeks alone, we have had projects in the scoring:
Where 75% of the investment was allocated to marketing. This is how the founders were planning to embezzle funds
where several million dollars a month were allocated for bonuses to the team over a year. The conclusion is similar to the conclusion above
Where inadequate revenue projections were given. Always compare what and how much revenue a startup can get
Use those red flags as indicators that the project is worth taking a closer look at and asking additional questions. Remember the DYOR principle - do your research. And analyze as much data as possible to increase your chances of venture success.
At first glance, this document may seem impossible to understand without an analyst but take your time. Take a closer look at the current figures and try to think logically. If you have direct contact with the startup, ask questions and clarify.
In the last two weeks alone, we have had projects in the scoring:
Where 75% of the investment was allocated to marketing. This is how the founders were planning to embezzle funds
where several million dollars a month were allocated for bonuses to the team over a year. The conclusion is similar to the conclusion above
Where inadequate revenue projections were given. Always compare what and how much revenue a startup can get
Use those red flags as indicators that the project is worth taking a closer look at and asking additional questions. Remember the DYOR principle - do your research. And analyze as much data as possible to increase your chances of venture success.