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Five avoidable mistakes startup founders make
Colin Kinner, founder of Startup Onramp sheds light on five 'rookie' startup errors
Thu 31 August 2017 - 9:57 amFeatured | Raising capital | Startup | Tips | Advice
We’ve all seen the grim statistics: more than 90 percent of startups fail. It’s widely acknowledged that many of these failures are caused by “rookie mistakes”. Yet, having worked with hundreds of startup founders as a mentor and investor I continue to see the same mistakes made again and again.
At the same time I have observed some consistently valuable behaviours among successful startup founders that lead their company to experience explosive growth. Perhaps it’s due to the relative immaturity and geographic dispersion of the Australian startup community, but there are still way too many startup founders who are not exposed to best practice and are not emulating the behaviours of our best founders.
So what are some of the most common mistakes that startups make?
1. Building a product that nobody wants
Just about every startup founder knows the term “lean startup”, but sadly owning a copy of “The Lean Startup” book by Eric Ries, or “Running Lean” by Ash Maurya, isn’t enough. The advice to validate your idea with customers is widely talked about but rarely followed.
Some founders believe it doesn’t apply to them, and it’s easy to see why: every time they share their new product idea, they are told how awesome it is. Such is the Australian way. Buoyed by confidence that everyone wants their product, new founders can burn through their cash reserves building a product before engaging fully with potential customers (those prepared to part with real money). I have seen too many startup founders spend tens of thousands of dollars and months of their life building a product before actually validating that it solves a real problem and can be monetised.
2. Outsourcing tech development
When forming startup teams people often gravitate toward others with similar skills. More often than not this results in teams with domain experience but no tech skills.
Hiring external developers can work for some startups, but it’s generally not a road to success. Founders are building a tech company, and as several prominent Australian investors have pointed out, a tech company that lacks tech skills within the team is simply not investible.
The reasons for this are simple: pre-revenue startups need to conserve cash, and haemorrhaging cash to pay an external developer is a poor alternative to having the tech skills in the team and available at little or no cost. Also the cycle time for product iterations is greatly shortened with an internal tech capability.
3. Issuing shares upfront to co-founders
Most startup teams are reasonable people and want to split the equity in the company equally among the founders from the outset.
Unfortunately this approach has two major drawbacks: First, it fails to recognise the reality that in most startups the founders’ contributions are not equal. Some investors view an equal split of founder equity as a warning sign that the team makes lazy decisions or is unable to have a robust conversation about the relative contributions each founder will make to the company.
The second issue relates to issuing shares upfront. A startup with three founders may well issue shares, equally or otherwise, to all three founders when the company is incorporated. However problems arise when one of the founders quits in the early stages, as often happens when things get tough, or when financial pressures mean that a founder needs to go and earn an income to pay the bills.
This is a surprisingly common scenario, and one that sees the departing founder walk away with a large chunk of the business to become a passive shareholder. This can be a major demotivating factor for the remaining founders (who are working their backsides off but for no additional benefit) and also makes the company much less attractive to investors.
A better approach is to adopt founder vesting, in which each founder earns their equity in the business over a period of time, contingent on their ongoing involvement. Typically, a founder vesting schedule has two components: a one-year cliff which allows for 25 percent of each founder’s shares to vest at the end of the first year. If they depart within the first year they forfeit all of their shareholding on the basis that they really haven’t contributed much value to the company. The second component is monthly vesting in which the remainder of their shareholding is vested in equal instalments over the next three years.
Founder vesting is important because it allows for the departure of founders in the first few years of the business without causing major harm to the company’s prospects.
4. Getting naming and branding wrong
If I wanted to start a company called Facebook today I wouldn’t be able to have the domain facebook.com (for obvious reasons) – nor would it make sense for me to go and register facebook.io, facebo.ok, getfacebook.com, facebookapp.com or any other variant.
Still, I see lots of startups making this mistake and compromising the strength of their brand from the outset by choosing a name for which the dot com is not available. Instead they settle for an inferior domain such as [company].io, .biz, or engage in domain hacks such as the examples above. I strongly believe that Australian startups that plan to go global should have the dot com from the outset.
Apart from causing confusion among customers and making it harder to find the company, the biggest issue I see with this brand compromise is that it signals weakness. As pointed out by Y Combinator founder Paul Graham, startups that choose a marginal domain are often viewed as marginal companies.
Don’t get me started on names that are hard to spell or hard to pronounce…
5. Not understanding how to raise capital
Fundraising is one the hardest and most time-consuming tasks for a startup founder, and probably the area in which founders struggle most.
Many founders don’t understand how investment works, or what investors are looking for, and as a result spend a lot of time pitching investors before they are ready, or approaching the wrong investors.
Startup founders need to build relationships with investors over a period of time rather than show up and ask for a cheque. Good investors like to get to know founders before they pitch for funding and are happy to offer them advice. As Elaine Stead of Blue Sky Venture Capital puts it: If you want to raise money, ask for advice. If you want advice, ask for money.
Getting fundraising right is crucial for startups because they have a finite runway and can’t afford to spend time talking to investors who will never invest. I often tell startup founders that their job is to find investors who share their vision and deeply understand the problem they are solving, rather than attempt to convert investors who either don’t understand their business or are sceptics.
About the author
Colin Kinner is the founder and co-facilitor of Startup Onramp, a 12-week training and mentoring program for aspiring startup founders. Colin is an experienced startup educator who has trained and coached hundreds of aspiring entrepreneurs. He is passionate about helping founders to be successful by learning from the experiences of others. Colin is also Mission Lead for the Startup Catalyst Silicon Valley program, Investment Manager for the CEA Startup Fund, Program Director for the Horizons Travel and Tourism Accelerator, and author of the StartupAUS Crossroads report. His previous experience includes running a startup incubator, a $10 million seed fund, and serving on the boards of a number of venture-backed technology companies.