Investors back start-ups that truly understand their industry - not just the opportunity but also the challenges of scaling profitably. If your numbers are credible, well-researched, and reflect a clear path to sustainable growth, you’ll stand out in the funding race. Start-up founders often fall into a margin trap, where their financial projections show skyrocketing profit margins in later years. This red flag can easily derail a funding round as investors quickly spot the inconsistencies. 

One reason is a lack of business acumen. Founders, especially first-time entrepreneurs, may not fully grasp the complexities of scaling a company. This is a clear sign for investors to walk away, as unrealistic projections indicate a misunderstanding of industry dynamics. We have seen countless start-ups pitch sky-high profit margins that vastly exceed industry norms. While ambition is great, unrealistic numbers signal either over-optimism or a lack of research — both red flags for investors. If your start-up’s projected margins are wildly higher, we will ask:

• What makes your model so unique?
• Have you accounted for scaling costs and competitive pressures?
• Are these numbers based on solid research or just wishful thinking?

The third fall for margin is underestimating the true cost of scaling. It’s easy to project soaring revenues, but growth comes with significant costs — and failing to account for them can derail even the most promising business model. Scaling requires more infrastructure and higher overhead while increasing complexity. As customer demand grows, so do support, logistics, and recruitment costs. Meanwhile, technology, compliance, and marketing expenses often scale faster than expected, adding pressure to margins. The effort needed to generate the next 100K in revenue is rarely the same as the first - it tends to rise over time as the easiest wins are exhausted, competition intensifies, and acquisition channels become saturated.

Hence, founders should balance ambition with realism. If they want to secure investment and make it to the next round, bring financials that tell a convincing, benchmark-driven story. Investors are more likely to back founders who approach growth with financial discipline and realistic forecasting. Presenting well-researched, credible financials – grounded in a clear understanding of scaling’s challenges – will put founders a stronger position to secure funding and move to the next round.