Some are calling it a start-up bubble. It’s filled with 23 yr old bright shiny faces with big ideas to change the world. They are getting funding and they are building companies, of epic proportions. They know nothing about building and running companies, of epic fail.
I remember being pregnant with my daughter. I read every book about motherhood and preparing for the first week, six weeks, three months. The long road ahead of no sleep and colic and spit up and all the horribleness that is the first year of life. I read these books in the beautiful chair in the beautiful room that I designed for my soon-to-be-beautiful daughter. I read the horribleness of the first year of life but with a bright shiny face of a pregnant mother who cannot possibly know better. People told me about all the things that would make me not want to procreate but all I could hear was “la la la and a patch of daisies.” Yeah, then she came screaming into the world and screamed for 3 months. This was not the bliss I had expected at all. I was not prepared for the hell of the first three months because I had never lived through it.
When you’ve never been through something it’s almost impossible to see the pitfalls along the way. As I sit in the Tech Stars office and look around at all the seedling companies working tirelessly toward their big moment in the sun, all I can think about is “I need to help these companies from making the mistakes others have made, including me.” So, here it is…Don’t worry, there are way more than 5, but I didn’t want to scare you too much. 🙂
The 5 mistakes that can crush your company
1. Hiring too fast. A CEO once told me: “Only hire when you absolutely cannot take the pain anymore.” Hiring ahead of pain is catastrophic. When you hire on pain, you know exactly what you need, you’ll find the right person and you’ll have a line-up of about a zillion things for them to do on Day 1 to add value. When you hire because you think you might have pain in a few weeks, you hire people who are probably very smart and capable but who have no clue what you need them to do now because they are waiting for the pain to start. Staying lean hurts. It means everyone is doing too many jobs and there’s not enough Amp to go around during all-nighters. But conserving your precious cash is what it’s all about. Stretching your funding as long as you can is one of the differences between greatness and failure. Remember getting your A round will take 2-3x longer than you think it will. Budget accordingly. Be smart. Don’t overhire.
2. Delivering too slow. So you have your funding. You have your core team. You have something built. You have your list of projects. Now what? It can be overwhelming to get the delivery machine going but your entire focus needs to be on one thing: results. The only way to secure the next round is to show one thing: Momentum. Momentum is the name of the game. It can mean different things depending on your company. Maybe for a SAAS business it’s a significant number of closed, meaningful deals and a full(ish) pipeline behind them. For an ecommerce company it’s transactions, average order value and low CPA. Each start-up needs it’s own KPIs and metrics that are laser focused on building and sustaining momentum. There is a misconception that VCs only give funding to companies that generate gobs of revenue during their Seed round. I have seen deals where VCs fund companies with little to no revenue because they see the proof that the model works because there is…Momentum.
3. Being too attached to your idea. As a founder, it’s tough to let go of your original idea. Now, when I say “let go” I don’t mean let go completely. What I mean is that, as a founder, it is of critical importance that you hold your idea at arms-length so that others can help you make it better. The market influence, your staff’s influence, your customers’ influence, your investors’ influence, they are all realities and it can be much easier to sit (or stand) at your desk and pretend that they don’t exist or that customer is an idiot for not buying or think that when you launch the next feature it’s going to work. But the typical reality is that you have a great idea, but it needs to be injected with truth serum. It needs to be tested in the wild and you need to be open to the twists, turns and pivots that come with an early idea and finding out how to refine it so that it’s a great idea that deserves more funding. Think of seed money as money to test and learn. Take full advantage of other smart people who can help you make your idea into a better product.
4. Failing to plan, forecast & budget. I am ruthless with planning and budgeting. I have heard start-ups say: “What is there to budget and plan for? We might not be around in 6 months and who has the time to sit around working on a model?” Wrong. Typically, seed round investors are willing to put money on ideas and people. They know you don’t know the intricacies of the entire pricing model yet or how the market will buy or not buy and they don’t expect you to. But, the A round is a different ball game. It’s all about getting your existing investors to pony up more money, getting new investors to pony up new money and making it all happen without much disruption to the business. You will be in fundraising hell. New investors will do crazy due diligence and ask for numbers that you didn’t even think you could find. The more planning, forecasting and budgeting you do in your seed round, the more buttoned-up you’ll be when it comes to sailing through your A round. Oh, and a budget is of the utmost importance in ensuring…you don’t run out of money. We can’t have that happen now, can we? Figuring out all your operating costs is key and keeping them as low as you can go is the trick. So manage your budget tight and have your model and plan solid.
5. Thinking you have all the answers. Face it, you don’t. I’ve seen enough arrogant founders who refuse to ask for help or think they know exactly what the customer needs or think an advisory board is a waste of time. To them I ask, what makes you think you know it all? You don’t. Be humble. Surround yourself with as many smart people as you can persuade to help you. I met with a new founder last week and she said she will take a meeting with anyone she can get connected to that might be able to help her. Now, that’s smart. You never know where your next board member, advisor, employee, investor, co-founder, staff member, customer or drinking buddy could come from. It’s of critical importance to be honest with yourself about where you are strong and where you suck wind. Not a marketing person? Find someone to help you get it done fast and cheap. Not a finance person? Get a part-time finance guy to keep the books in order and keep you on track. It comes back to budget too. You might have to pay to fill the gaps but that’s going to make your company stronger. If you are afraid to ask for help because you think it’s a sign of weakness, just watch Amanda Palmer do it. It’s your company. Don’t go down in flames because you thought you were so smart you didn’t need to listen to anyone else. That’s a big bowl of founder fail.
Seed to A Round is probably one of the most difficult steps to take. A recent study by boutique law firm Silicon Legal Strategy found that 46 percent of startups that got their seed funds in 2010 went on to a Series A round by the end of 2011, but only 24 percent that got their seed round in 2011 had done the same by the end of 2012. VCs are looking for more real proof that your idea is not just an idea. They want proof that it is a business and that it’s positioned to disrupt a market and deliver a 100x return on investment. That’s the way it works.
How is your company positioned to avoid the pitfalls and rise to greatness? What other mistakes have you watched early-stage companies make? I’d love to hear your comments.
Being an entrepreneur requires great emotional strength, endurance, vision and balls.