Today I held a presentation at the bar camp in Munich about what we have seen to be the most common mistakes for failure in a startup (slide on prezi in German can be found here). I called the presentation the 7 deadly sins of startups.
Every great company starts with an idea. However, some people never take it further than that. Although I can see some fun in the mental stimulation of checking every bit and corner, no startup has ever made it just by thinking everything through.
Once we are actually talking about an idea, it sometimes happens to be a great idea but lack any characteristics of a great business. What makes a good business? Well, my colleague loves the term “significant customer pain” whereas I refer to “product-market-fit”. No matter what you call it: someone needs to be paying hard earned cash for it. That’s when you know you hit a nerve.
On a side note on this point: do not try to waste too much time getting some sort of validation from business plan competitions. Every minute you spend working on the paper you need to hand in for such a competition is a minute you didn’t actually put into the operation of your startup. Make sure you understand why you are participating in a particular business plan competition and also remember that there are VCs scouring these events as well. Too many business plan competitions can hurt you more than you might be able to benefit from them. Once you get to a VC after five of such competitions, the VC might ask “What is it that the other VCs already saw in this startup that they did not make an investment?”
A common mistake is that people who are similar tend to flock together for a venture. However, in a fast-changing environment of a startup, like-minded people might not always come to the best solution. There are many studies showing that diverse teams are able to tackle problems best. But instead of hiring very different people, I suggest you identify who you really need and go search for that person now! It usually takes longer than you might think and you also want to be sure about who you hire.
And don’t forget: VCs hardly ever fund a one-man-show nor do they like to invest in 10 people who just came up with a business plan.
The execution of the daily business at a startup is usually the responsibility of management while most people are taking over several responsibilities in an early stage company. Should management prove to be resistant towards advice, it will get hard for investors to stay on board. If there’s something VCs don’t like it’s when the entrepreneurs don’t want to listen to their equity investors. In the early stages of a company building process, everyone needs to work on all ends, focusing on a combined goal: bringing the product and the company forward. But the direction might sometimes not be that clear, shifting direction every once in a while. Remember eBay in the early days when it was a simple trading platform for Beanie Babies?
In addition, management sometimes refrains from using statistics to run its operation smoothly and stay in control. I am not a strong proponent of using metrics at every level and for all tasks but making sure that they key metrics are being monitored is crucial for employee retention and future success.
In line with this is also the goal of keeping release cycles as short as possible. Only when people realize that there is constant development in the process they will get engaged and actually stay onboard.
Another of the common mistake is “build it and customers will come”-attitude. Basically, this is a problem of business acumen, not understanding that everything needs selling. There’s probably only one industry where I know that whatever you build will be sold: pharma and med-tech, assuming someone really finds the cure to a disease.
The opposite is to hedge. At a startup where cash is limited and nothing is more important than finding and serving the right customers, all hands (and brains) should be dedicated towards supplying and supporting the most lucrative customer group, generating as much cash as possible. Depending on the stage a startup is in, it could also be not understanding the difference between customer discovery and customer development (for more on that see Eric Ries’ and Steve Blank’s presentations).
Quoting a friend of mine: “cash is oxygen in a startup” and there’s a lot that can go wrong here.
Sometimes it’s just a matter of attitude, people not willing to work at all or long hours unless they get paid for it (if that’s why you’re in a startup, it will probably be very hard to find someone to fund you as investors are usually looking for someone who is absolutely convinced of his endeavor and sute to walk the extra mile). In other cases, the planning is just off, underestimating the need for capital or realizing too late that finding additional investors might take longer than expected. As long as the startup is not generating enough revenue to survive on its own (i.e. sustain through organic growth), the time before the investment is like the time after the investment: you will always need someone to search for more investors.
A more peculiar European case is that investors here tend not to transfer the full amount of investment at closing but rather tie them to specific milestones. Those milestones can be number of (paying) customers, the development of specific product or feature or just reaching a minimum amount of revenue. The younger the startup and the further out those milestones will be, the greater the risk associated with these goals. As mentioned before, if the startup has just begun the customer discovery process, any goals two or three years out might be way off from what might be best for the startup at that specific point in time. Be also aware of milestones being set too ambitiously. There is always this trade-off between feeling the fire burn at a startup and goals that are simply too lofty for the little time given.
A lot of startups fail simply because the burn rate is just too high. How this can happen after a startup has not had any money in the first case has interested a lot of people from business to psychology. A well-known paper on this is by Mark Leslie and Charles Holloway on the Sales Learning Curve (Harvard Business Review article or more condensed version at the Stanford GSB website). Sometimes it is not just that the startup has a hard time learning how to climb that hill or profitability but also the fact that there is a difference between customers and paying customers. I personally liked Steve Blank’s question in sales meetings asking “would you take our software for free?” If the answer to that is a No you have to get back to square one.
The further you get down the road, the more you will care about what your competition does. Understanding who your competitors are in the first case and how the are competing with you is something you should at least spend some time on to understand the market you want to get in.
I have seen many business plans where people identify companies with the same technical abilities as competitors. As I wrote in an earlier post, it is not always the same technology that is in direct competition but sometimes just a very different technology that solves the problem in shorter time or with less effort. Hence, there can be way more competitors than you have initially identified, resulting in a very competitive market.
Being the first mover in a market that has yet to be developed is also connected to a lot of risk. Sometimes it’s better to have someone run off and scour the landscape, educate the customers and pave the way for anyone who is following just to make it easier and less costly wandering on the same route.
This list is by no means exhaustive and I am sure that the list might look completely different depending on who you ask. Maybe it’s a good idea to update this list in a year or two just to see if the problems changed. In the mean time, feel free to reach out and comment.