Wednesday, November 26, 2014

Startup Sins

During my 15 years of helping start and working for start-up companies, I have learned a few things from all the mistakes I have made and from the mentors and advisors I have met and worked with. Though there are dozens of things you may have to worry about when starting a company, I will highlight the 3 Deadly Startup Sins that will pretty much guarantee your eventual failure.

Leadership

Actually, Leadership is the number one element in the eventual success of any new endeavor. And the number one mistake made with most start-ups is assuming that the founder or inventor should be the person running the company. History has proven this is often not the best course of action for the success of a company. Henry Ford stated that even though Thomas Edison was the smartest person he had ever met, he was a horrible businessman.

I have seen far too many people, who happen to be brilliant inventors or scientist, be absolutely horrible leaders. Ever endeavor, large or small, rises and falls on leadership. A great leader can take a mediocre idea and make it successful, while a poor leader will ruin a superior idea with poor execution, lack of buy-in, sloppy team building, and total disregard for the “laws of physics” when running a startup company.

I am not saying a founder cannot learn to be a leader. I am saying that if you have a chance to secure a great, proven leader, do so as soon as possible. If not, make sure that you put as much effort into getting good leadership as you do in perfecting your product. Without this leadership, you will have great difficulty in building out your team, keeping them together, and attracting investments.

Strategy / Marketing / Positioning

These three concepts really go hand and hand. Know your Market and your Customer. I cannot stress enough about this. You better know how you will differentiate yourself in the market place as well as who your target customer is. I mean, know intimately what are they buying now, who is the biggest player, why are they good, where are the opportunities, and how are you going to exploit them. Also, what are you doing differently for everyone else? Does your product, systems, or services have a sustainable competitive advantage? How are you “cheating” or "gaming" the system? Knowing and understanding the answers to these questions will help you position your product or service better in the eyes of your potential customers and help reduce the friction involved in growing sales.

Another big mistake most startups make is assuming what they are dong is so unique and different that there are no competitors in their space. If you think you do not have any competition then you are just delusional, and you should stop what you are doing right now.

Even when the first integrated circuit came onto the market, it had competition, and it was from the vacuum tube. Everything has competition. Actually, the MORE competition and the larger the market, the better your chances are for success. Why? Because in a large market, your competition cannot do everything, and your company can feed off the crumbs that other companies are not focused on to stay alive. And if you are lucky, you can hold on long enough so that your cheaper, faster, better product or service can truly revolutionize the industry.

Be prepared to change. Rarely will your product or service hit the target on the first, second, or third time. Hopefully, you will get within 70% to 80% of your target. All that you are trying to do is “be where the puck is going to be” because your markets and targets in the future are constantly moving. As such, if you stick with your initial “idea” you may find that your market has moved away, new competition has surfaced, or what you thought was a good idea is not anymore; and that revenues will not keep up with expectations.

Greed

The hardest thing to do for an entrepreneur is to divvy up your company. You put in the sweat, hours, capital, and ideas for getting this baby going, and now you feel you are entitled to own the lion’s share. Just remember this, it is better to have a small piece of a hugely successful endeavor, than 100% of nothing. Greed may be good in the movies, but it is a sure way to failure for a startup.

As such, be generous with the core team of individuals you entice to come onto your team. If you do decide to take the lion’s share of the stock, you will have to give up a huge amount of salary in exchange. If you do not give enough stock to your core team, be prepared to have one or all of them leave just when you need them most. Also, be prepared to pay more hard cash for talent if you do not give up some extra “free” stock.  Of course, being generous does NOT mean being foolish.  Make sure your get "effort" and "output" from those you are giving stock to.  That means make ownership contingent on some tangible milestone in the future and if it not met, explain to them you will need that stock to find someone else to do it. 

Once you hand out the “founder’s” shares, the next step is getting investors to pony up real money and invest in your company. For most founders, this becomes an increasingly difficult task, primarily because you are too close and too invested in the company to make a truly rational decision. You either think your idea is worth more that an investor is willing to pay, or your feel the investor just wants to take over your company. You might be right on both counts, but there are ways to protect both your and your investor to achieve a win-win solution. One sure way to scare off investors is to put a sky-high valuation on your “idea,” or ask for tons of money up front without any sales history. It can happen (i.e. Amazon.com) but it is rare.

Any investor in your company should want the same thing you want, a successful endeavor that eventually gets to significant cash-out position. In actuality, you really should not focus too greatly on what valuation you get in your first round, as there are numerous ways for you to minimize the hit you take, in terms of giving away your company, in the long run. One way is to offer the purchase back ½ of the stock the initial investor paid for 2 times the amount within a specific period of time. Or you can forgo giving stock until the 2nd round of investment, and instead take a loan with a high interest rate. That “premium” interest rate can be applied to the 2nd round valuation. In addition, you can also offer a sweetener to the first investor. The important thing here is not to get too hung up on valuation and to think long term.

Secondly, make sure your investor is right for your business. Not all money is the same. A colleague and successful entrepreneur, Tom Dye, once told me to watch out for wedgies. A wedgie is someone who is trying to get leverage in your company without really doing anything to help you. They usually think that because they have invested, they know you business better than you, should have more control than you, and are not so much interested in creating a successful company, as just being in control. If you are unfortunate to have one of these investors, I feel sorry for you. You will be spending 80% of your time trying to please or answer to a wedgie, and not enough managing your company, customers, or product development.

Noticed I said little or nothing about what your product should do or what markets you should be in, or how much margins you should try to make, or how to bring your product or service into the market. You can make money anywhere if there is a need, a fairly sizable market, and a differentiated product. It will be much harder to do if you commit any of the startup sins mentioned above.

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