As we know there is no limit to the ingenious ways people find to royally screw things up – as a start-up or anywhere else. As one expert puts it, experience is what you get when you fail to get everything else you wanted so, in lieu of learning the hard way, learn from others! In order of importance, most important to least, I’ll cover some of them:
Mistake #1 (The Worst): Burning Your Bridges
Paraphrased, this came out more as “live by your word and act with integrity”. Interesting #1, this, because its not limited to startups, obviously. In the world of startups, however, there are many inexperienced people, sometimes significant personal money at stake, lots of uncertainties and a huge amount of trust needed between investors, boards, founders and employees to pull it off.
This can cause people to behave, lets say, in a manner which is less than desirable or ethical. And outsiders sometimes take advantage of this (example quoted: Facebook’s and Microsoft’s habits of structuring acquisitions to offer more value to key people they want to keep going forward, vs. the deal already agreed between the investors and the founders/employees).
The point comes down to this. As you go into this with your team – all of the stakeholders – keep your word, make sure everyone feels good and properly treated and take care of your reputation. If you shake hands and then do something different it will come back to haunt you.
Mistake #2: Not Focusing Nimbly
Focus is critical in startups. Its very easy to get distracted, or overreact to outside factors. That said, the reality is that things change as you go along. So you need to be highly focused, yet nimble enough to change tack if something happens to significantly impact your plan. Fact is, many successful startups never set out to do what they ended up doing.
Ann Miura-Ko from her investments: Chegg was Craigslist for Colleges – until Facebook started doing it, so now it’s textbook rentals for students; Circle of Moms was started as Circle of Friends by two young, single (no kids) guys as a way to create groups on Facebook, so when Facebook started doing the same thing they focused on Moms as one of the key active large groups that formed under their prior plan. (Hmm, notice a theme in Ann’s investing??).
Focusing nimbly was also defined by one panelist as being able to say what you do clearly, in one sentence. Focus certainly, not sure about the nimble …
Mistake #3: (Not) Letting Your Investors Become Your Trusted Advisors
This one actually focused more on developing the right dynamic between you and your Board/investors. A consistent theme was along the lines of “well, you (the CEO/Founder) are in charge and you need to run the company”, with of course the caveat that if we don’t like what or how you do it then we’ll take you out. Reality is that you need to pay a lot of attention to who you take as your investors and how the dynamic will play out. Many investors have two completely different sides – when things are going well, and when things are not. So check out both sides with people who have worked with both sides – before you take the money.
If you need more help from your Board or investors its OK – to a point. Introductions to potential partners? Great. Taking over running the business – not good. It all depends on the timing, the relationship and the needs. Generally investors want you to listen to what they have to say, but not be told what to do (otherwise they should get someone else). So you have to figure it out but with their advice and input.
This also helps with one key point: never surprise your Board! Always keep them in the loop, knowing what’s going on.
Mistake #4: Not Having Trusted (Valuable) Advisors
Naturally I like this one (becoming a trusted advisor – and earning that role – is one of the ways I help startups myself). And I agree with it because even experienced entrepreneurs don’t know it all. They tend to know a few things well, and the rest has to come from around them – the team, the investors/Board and the trusted advisors.
In this case “trust” means “valuable”. They need to add true value. If they are just names on paper to look good then they’re just endorsements -and largely worthless. They need to be real help to you. You should hire an advisor the same way you hire an employee – carefully, with reference and other checks. Paid or unpaid, cash or stock, depends on the value and the role.
However advisors will get frustrated and move on if you don’t know how to use them, receive the advice and know how to parse and act on it. This does not mean blindly following the advice. But if you ask for advice then please accept it and decide how you will use it. And don’t try and do it all yourself.
Mistake #5: Not Recognizing When to Supplement or Shrink the Team
Founders who fear bringing in the right people at the right time are a problem. “When I find someone as smart as me then I’ll bring them in” – wrong! Engineer founders generally don’t know how to build sales and marketing. The culture you want determines the kind of people you hire. You should always be hiring or shrinking – but make sure the people are the right fit (don’t hire guys with machetes if you are already on the highway). Personal characteristics and motivation are always the most important, not the specific skills – you can learn the latter but not the former.
Mistakes #6 and #7: Not Having a Real Plan – and Not Knowing Where You Are On Your Roadmap
A key emphasis here was to insure you figure out what type of business you are building – a big or small company, a home run or a single. This is really important because it determines much of what you do – and who you hire and whose money you take. The reality is the vast majority of startups that succeed turn out to be single. Very few ever IPO (fewer than ever). Most will get acquired if successful. And for you as a founder you may be a lot better off taking smaller money from angels or smaller vc’s, controlling your destiny more and getting a larger share of a smaller business (and more total dollars) than someone who swings for the fences and even if successful gets a very small piece of that bigger business. Regardless, you need to build your business to be independent, not just to be bought.
Always have a clear plan – but be nimble enough to change it if you need to. If revenues are less than you planned then you need to find new growth or cut expenses. This is partly why investors bet on people – things rarely go according to plan and how the people handle it is key. Knowing where you are on your roadmap then becomes key – is your hypothesis (for that’s what it is) working or not? By the way – as I’ve written about before – tying funding to milestones is wrong, not just because its a cheat on valuation by the investor but because you may need to change the plan and the milestone becomes a millstone.
However metrics are important. Here’s what we said we’d do. Here’s what we did. Here’s what we’re going to do next. It’s your feedback mechanism. Why is something drifting? Be ready to reset if needed, or take other action. Be super transparent, regular, communicative and avoid surprises.
Mistake #8: Being Penny-WIse and Pound Foolish
As a financial advisor and CFO to startups of course I have to echo the starting point on this one – the panel’s statement that you need to have a good CFO or Controller. It’s still a surprise to me that so many startups don’t have either one – and in fact frequently don’t even have a good bookkeeper or basic financial information available. The panel view was that you need someone on board who doesn’t want to spend money BUT the real key is someone (CEO’s are often not the right ones) who can help make the right trade-offs. After all, saving $5k a month in online marketing is a false economy your total burn is $150k/month and not spending the $5k means you take X months longer to make your target. Not having a top sales person is a bigger mistake than having a colour copier. I’ll repeat a personal view here: the right financial person on board (emphasis on RIGHT) will pay for themselves many times over in better business decisions and return on investment.
When you have raised money (see below) then have self-control and don’t defocus. If your plan said you would spend $Y on marketing and you raise the money you needed then don’t go spend that $Y on swanky new space instead.
Mistakes #9 and #10: Never Be In The Position Where You Have No Money; Don’t Raise Too Much or Too Little
Sounds obvious. Amazing how many don’t figure it out. Cash is the rocket fuel so you need to raise it. Be sure you know you much you need to get to the next key funding milestone – then raise more because it will take longer than you think to achieve that milestone. But also, raise money when you can, not when you need it. Timing is a key factor – not just in your business but when the market is more ready to supply funds is critical.
Be forced to make tradeoffs and prioritize. Be very lean during product development and market discovery, then accelerate to ramp up the customer acquisition and returns.
Raising lots of money at a high valuation means you need to have a big exit. This will NOT happen for most companies. Solid singles (an exit in the $50 – $100m range) are a great result for most people. When raising money don’t obsess on valuation. Take a reasonable valuation and focus on increasing it solidly between rounds. Down-rounds are viewed very negatively (in fact they can be the kiss of death).
Finally, raise money strategically. This means raising based not just on cash needs. You need to have in mind what business you’re building over the longer haul, who the investors are and what they bring to the table that can truly help move the business froward. Yes, terms are important but get a win-win-win out of it.
About the Author
This article was written by Philip Smith of Silicon Valley Frontlines, he provides consulting to startups and emerging companies.