19 Feb 2021, 13:23 — 10 min read
Entrepreneurship is all about learning from mistakes, but it’s always smarter to learn from the mistakes of others.
All seed-stage startup founders love their dreams for the future. They are out to create history without learning from history. It takes a wise man to learn from his mistakes, but a wiser man learns from another’s mistakes. These lessons are a compilation of basic mistakes made by early-stage startups.
When you read this article, you will —
I am sure startup founders, investors will contribute with their rich experience in the comments section and help build a useful repository of failures to learn.
They fail to develop a convincing pitch narrative that will attract and persuade investors to fund the idea. They pitch their technology product and not a business. A complex idea, though very useful, is of no value to customers or investors if they can't understand it.
The biggest failure happens when tech founders are unable to release the product as they are building it ground up. They do not believe in partnership and overbuild the product. It is evident that when you roll out your custom code, everything takes time; more time than you can afford. Your priorities end up in chaos; you end up wasting a lot of time.
The mistake startup founders do is to hire people with credentials. The startup will be in serious trouble when you hire people who have no hunger to achieve. These people come with a baggage of entitlement, commitment, expectations and their own way of doing things at work. For early-stage startup companies, every hire can make or break their future.
Too much money is like having too much time. Founders lose focus. They end building a plan to spend, not to build a business. Too much capital at the seed stage changes the startup team mindset in unhelpful ways. On the other hand, shortage of capital in the early-stage forces startups to make hard choices about what will they build and what they won't.
All founders have a hypothesis that they are solving a big problem and go all-in basis initial evidence found with anecdotal success. It puts you on the wrong track, and you will end up building products with no specific target users in mind. The product they have built solves no one's problem. Make sure that your customers/users/buyers/clients exist.
These founders have little or no understanding of finance, cash flows and prudent use of funds. They spend recklessly on fancy office setups, customer acquisition, parties, promotions, advertising, branding and on additional hires. They don't plan ahead; in reality, they have no plan. They believe that they are not accountable.
A startup typically gets choked serving a big customer. The bigger the customer or the contract, the more time it will take to develop and deliver the product. At an early-stage startup, you tend to customise your product or services to the big customer’s needs. It equally creates a financial dependency.
These founders are lone rangers. They can't work with a team. They do not trust anyone. They do not delegate. Every founder is human and no one has unlimited working hours or energy to solve everything. These startups can't scale very soon; as decision fatigue will soon set in.
It is tough to raise capital, but it is lethal if you raise capital from toxic investors. Early-stage ideas are fragile and need lots of nurturing. If founders chase money blindly without understanding the background, culture and intentions of investors, they are bound to fail. Your selection of a first lead investor is a critical decision which should be taken on investor pedigree and not based on the investment amount.
The first and only priority should be about the financial health of the startup. At an early-stage, startup founders who have raised seed capital make the big mistake of feeding salaries to themselves and starve the business. Eventually, the business suffers and fails. Salaries are important so as not to create hardships for founders, but it should not be income-generating. Founders own a large share of the equity percentage, which is now valuable due to incoming investors, so the focus has to be on wealth creation.
Seed stage startups trying to ape large corporate businesses by offering everything to everyone cannot scale, build expertise, nor create leadership positions. To satisfy every customer, they end up burning capital in creating multiple products, SKUs and offerings. They end up becoming a bespoke services business or a living ‘dead’ startup.
Seed stage startups trying to perfect their product in the first year without customer engagement or users is a recipe for disaster. Whether it is free or paid, it does not matter at an early stage if there is no customer validation for the Minimum Viable Product (MVP). In that case, the capital invested is a write off. Many founders work primarily towards keeping investors happy by validating the MVP from investors. That is also planning for failure.
The brightest of the idea will fail if there is no visible plan to make money. The so-called cool, unique or noble idea out to change the world cannot survive by having perpetual losses with the use of venture capital. There has to be a visible path to profitability.
Startups whose product, business or services can be easily replicated, find themselves amongst lots of competition. They get out-competed by other entrants in the market. Some startups do not have any unfair advantage. They are copycats of big existing businesses with no unique value proposition and no direction to become a leader. These startups fail because they can't fight competition.
Startup founders are vulnerable at an early-stage and end up doling out large chunks of double-digit free consultant/adviser equity, without understanding the importance of cap table. This equity is granted without vesting and without any understanding of the buyback options. Seeing the cap table with heavy dilution drives away venture capital. Compensation by equity is the costliest way of financing your business.
100X is the first cheque, SEBI registered Venture Capital (VC) fund and an investment adviser. 100X offers promising startups seed funding, validates them and gets them started. The team at 100X works closely with each company on every aspect of the business and makes them investment-ready. One of the important goals of 100X is to help every startup raise the next round of funding. 100X is a startup investment discovery platform for Angel Investors, HNIs, Family Offices, Angel Networks Venture Capital firms. All that VC firms can provide is money, network and experience. For us, money is a small component, but by far, our value is in the network of investors and experience in building seed stage companies to scale. Visit www.100x.vc for more information.
If you are a startup founder ready for the next level of growth, it is important that you know how to pitch to an investor. In a webinar organised by GlobalLinker, I shared key tips for startups to pitch to a VC and answered some queries too. Watch the webinar recording below.
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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.