Someone once said that the only difference between those with experience and those without is that the experienced have already made all the mistakes the inexperienced will make.
If that is true, then Finish Line PDS certainly has a lot of experience. After almost 20 years of helping startups develop their products, we have seen a lot of mistakes.
The following is for those who would rather learn from other people’s mistakes than make it themselves – everyone else can stop reading now.
The 10 Biggest Startup Mistakes:
1. Listening to the Wrong People: There are many brilliant people out there. I am sure there are many people we know and trust; however, that does not mean we should necessarily be taking advice from either group about running our startup.
Taking advice from those we trust and who know us very well can be helpful, but only when it comes to making personal choices. Is this a good choice for me? Will I be good at doing X? What special challenges will I face doing this? However, when it comes to business, and especially startup business, are these trusted relationships really better than any other random person we come in contact with? Unless they have created and exited several startups, the answer is no.
The same is true with really smart and successful people. Success in one area does not necessarily translate to success in another area. The CEO of Apple is unlikely to give good advice to a startup in the seed stage of development. Get your startup advice from people who have succeeded (and failed) in startups – regardless of how impressive their resume is or how much you trust them.
2. Believing Raising Money is a One Time Thing: Raising money, at least at the seed stage, is almost always about convincing an Angel Investor that your company is a good investment. More often than not, the Angel Investor is one of those people with startup experience. I would argue they are the best advisors on the planet, and they pay you to give you advice.
Now that does not mean you should always do what they say – put two of them in a room, and you will get three opinions. However, they will challenge your assumptions and make you think more clearly about the business, making you better and your business better. Raising money is not a one-time event – it is a full-time job that is likely to last years. Whether or not you need money now is not the point. It would be best if you always had advice and there is no such thing as too much money.
3. Believing Your Time is Free: I started my career working for one of those big companies. Our group was responsible for developing the products, and we spent $250K per month – which was a lot of money in those days. However, our “budget” was $25K a month – since we could not “control” employee costs, it was not part of our budget.
Work would often stop because we ran out of budget to buy something needed to keep the project moving. Since “our time was free,” and anything we had to write a PO for was a scarce resource, we hired many people. Most of these people were rarely used. The organization became incredibly bloated, and management lost its focus trying to keep non-core people busy.
Our products started to fall behind the competitors in terms of technology, and suddenly senior management bought our competitor in to stay competitive. The point of this story is: your time is not free – it is almost certainly the largest part of your budget – even if you don’t pay yourself a salary.
Assume your time costs you 100s of dollars an hour (because it does), and make sure you spend it wisely. Is reading this blog worth spending your time on? If you turn it into action and avoid some of the expensive mistakes, we have made – absolutely. Should you learn how to code to avoid the cost of paying someone to do it – no, focus on raising money instead – see #2 above for why.
4. Believing the Idea is More Important than Executions:
Bad Idea & Bad Execution = Negative Value
Good Idea & Bad Execution = $0
Bad Idea & Good Execution = $1 Million
Good Idea & Good Execution = $10 Million
Good Idea & Good Execution & Luck = $100 Million
Having a good idea is wonderful but not sufficient. Without executions, it will not result in any value creation. Execution means using the idea to create a profitable business that earns revenue and profit. Good execution is about good decisions and avoiding the mistakes on this list – along with a whole lot of hard work.
5. Hiring Full-Time Employees: If you look at most lists of “why startups fail,” the number one reason always has something to do with running out of money. Look deeper, and find why they ran out of money – they could not pay the bills and had to lay off all the people and shut the doors.
Entrepreneurs are positive people. They absolutely believe they will succeed. I have always argued that this great confidence is a prerequisite of a successful entrepreneur as they take risks most people could not tolerate. However, if this positivity is allowed to cloud judgment, it can often be the downfall of a startup.
Revenue may not come in as fast as you think. Your idea may not be the perfect product-market fit, and you may need to pivot. That guy you just hired may be more of a liability than an asset. It just might be harder to create the processes and system to run the business than you think. Our advice: Don’t hire any employees (with a couple of exceptions) until you have a working process that can be repeated and generates the result you need to create a profit.
Creating a functional team with all the right people in the right position doing the right things is incredibly expensive and takes a very long time. It is almost always cheaper to outsource these tasks to companies who have spent the capital needed to create these functional teams. Yes, once you scale, there may be an argument that the investment needed to create these teams would have had a positive ROI. Until that time, stay lean and keep the runway long. Often the key to success in a startup is simply surviving long enough.
6. Not Having Clear Roles and Responsibilities: There is always a balance between making decisions well and making them fast. In a democracy, this decision-making takes a very long time, and the outcome is less than optimal.
The reason for this is because you not only have to decide what the right thing to do is, but you also have to decide if the voting public wants that thing done. In an autocracy, decisions take very little time, but the results are, at times, less than optimal (sometimes disastrous).
In a representative democracy, decisions are made quickly, and the result is good (at least better than the other two). The reason this happens is that in a representative democracy, there are clear roles and responsibilities. The president runs that day to days stuff.
The Legislators create the laws. The courts interrupt the laws. Each has a clearly defined role and is held accountable. The same is true in any well-run company – especially small companies. Each person should have a role and a responsibility. These roles and responsibilities need to be quantifiable.
By “role,” we mean that person makes the decisions for their area of responsibility. By responsibility, we mean we hold them accountable to a number – called KPIs (Key Performance Indicators) or KLIs (Key Leading Indicators). It is the CEO’s job (I like the title Integrator better) to assign roles and responsibilities. You should be able to walk into any business and asks any person, “what decisions do you make” and “what number(s) are you held accountable to producing.”
7. Hiring the Cheapest: Hire the best, not the cheapest. Startups are very hard, and they are not a place for amateurs. It is much more difficult to succeed in a startup than in a big company with a ton of support for less than fully capable people. Getting people to work for stock, or getting students to work for free, or some person who works for a lot less than the going rate never works. The most expensive mistake I ever made was hiring a cheap engineer.
8. Designing the Perfect Product: No product survives first contact with the customer. As an entrepreneur, your job is to discover the perfect product – you can not know what it is. You must discover it. Unless you engage customers with a product, you will never know what the perfect product-market fit is. Market Validation is the first step to product development. Skip this step, and you will almost certainly spend a lot of money designing a product no one will buy. Also, without good market validation data, you are unlikely to convince any investor to invest.
I once asked an investor what his secret was. He told me he could tell with one question whether the entrepreneur was any good. The question was: what percentage of your time is spent talking to investors and customers? Any answer less than 75% was a red flag.
9. Not knowing your numbers: Business is a numbers game. Any change that does not result in the numbers changing is not really a change. It is fine to have altruistic goals for a business, but you can not achieve those goals unless you make a profit.
Even if that profit is made in the future, you still need to prove those numbers if you wish to convince an investor to invest. Every business has a unique set of numbers that have special importance. Maybe it is the Customer Acquisition Cost, or the COGS, or the Cost of Capital. Having an accountant create a generic Chart of Account and “do the books” without the involvement of the operating managers will not result in discovering what numbers are important and which are not.
A good CFO provides meaning to the managers from the numbers. Without this meaning, it will be hard to make decisions. If the numbers are wrong, things get even worse.
10. Not Understanding a Startup is Different: Startups are very different than established businesses, and it is not a small difference. You are creating a company – not maintaining an existing business.
It’s like the difference between designing a car (the engineers) and maintaining a car (the car mechanic).
The engineers start with a blank sheet of paper – they have to develop the systems that will be used to make the car work. The mechanics need to figure out what is wrong with a system, repair it, and keep it from happening again. Entrepreneurs create business systems.
Established business leaders maintain existing systems. 99% of people have never created a system and have no clue how to do it. If you ask what kind of system we should create, they will describe the system they used in the established company – it worked there, so why not here. Recognize that one: you are creating systems, and two, most people/advisors/companies will not be able to help you create them.
For more information on how Finish Line PDS can help you avoid the startup mistakes we have seen – and a few we’ve made ourselves – please visit our STARTUP Hub.