The Top 10 Mistakes to Avoid in Your Startup

Over the 30+ years I have worked in and with startups; I’ve seen it all. I am constantly amazed at how many ways people can screw up amazing opportunities. Here are the Top 10 startup blunders I have witnessed recently. Avoid them and you will improve your chances of success.

1. Making it personal. As entrepreneurs we pour everything into our business—our money, time, creativity, passion, hopes, expectations, and our dreams. To often the lines between the business and who you are as a person can easily blur.

This becomes really difficult when you are faced with hard feedback from customers or from potential investors. I personally won’t ever forget sitting in a VCs office with 3 young men who were recent graduates hired to evaluate companies before a partner meeting. One of them actually said to my partner and I; “we’re concerned you don’t have enough time in the saddle”. Never mind that our collective management experience may have exceeded their collective ages, it certainly exceeded their IQ.

You are not your business, and taking anything personally will only hurt your chances of learning something.

When, for instance, someone says no or you make a mistake or an employee walks away or people give you input you're not ready to hear, it is not about you personally. If you understand this, you'll make smarter decisions and spend less time licking your wounds and more time making money.

2. Avoiding customer feedback. I admit I am biased. I teach Lean Business Model Canvas (LBMC). I’m a Steve Blank disciple and I eat and drink LBMC every day in every business. Our mantra is, companies never go out of business from having too many customers. They go out of business because they are not able to solve a customer problem. Don't be afraid to ask people in your market what they need and want. This is the most essential element of your success as a startup.

What that means is startups are NOT a smaller version of a large company. Companies must execute. Startups must discover their customers. Early conversations with customers will help you avoid mistakes and understand how to deliver a product they will pay for. Talking to customers can only help your business.

The best feedback will come from those who don't love your product or your brand and their honest feedback is worth listening to before you spend too much money. You may be missing a huge opportunity by ignoring customer and market feedback, so stow away your feelings and fears and get yourself out there.

Bottom line; fall in love with your customers not your product.

3. Not knowing your numbers (or KPIs). Metrics are the key to success in any startup because you can't fix it if you don't know how broken it is. When I help startups understand their numbers, they feel more in control, make better decisions, and even have a renewed sense of hope.

Numbers tell important stories; listen to them and the path to success will become clear.

So what numbers matter most to a startup? Customer Acquisition Costs (CAC), Customer Retention, Number of Touches, Monthly and Annual Recurring Revenue, Churn, Referral Rates, Conversion Rates – do your homework – the numbers matter.

4. Failing to become the leader. As a new entrepreneur, we all start out wearing many hats, product evangelist, culture warrior, even programmer or janitor. In startups you will do everything from janitorial work to sales - but at some point you'll have to step into the shoes of a CEO, the leader of the team.

In this role you will need to be able to articulate your company's mission and a clear and concise vision.

You'll have to communicate your vision to many people while maintaining a solid grasp on the processes you helped to design, company culture and policies, and partnership and growth opportunities. What will make you a successful entrepreneur in the end is your ability to make the transition from solo superstar who attracted the money to a leader of a competent team who can share the spotlight – and your success.

5. Stress eats you alive. I always say that startups are a living version of the serenity prayer. You will need to have the courage to change the things you can, the serenity to accept the things you cannot change and the wisdom to know the difference.

Stress kills intelligent business.

As a Founder the feeling that it is all on you, it’s all about you, can wreck havoc on your professional and personal life. So, learn from your competition, listen to your spouse, rely on good friends for advice. Cultivate mentors. Most of all remember what got you to this point – your authenticity, integrity and enthusiasm. Get out there and be yourself. Spending time obsessing over the competition distracts entrepreneurs and deepens doubt and fear.

And, if you pay attention, you’ll always find it’s the last line of the serenity prayer that is the most difficult.

6. Choosing the wrong partners. This one of the mistakes I make most often myself because I like people; I want to believe in them. But of all the mistakes this is the saddest and most destructive of all. Don't choose a partner, whether a co-founder or outside partner, based on a few exciting conversations. Make an opportunity to work together – and take time to make sure you are partnering with the right people.

It's important to balance any partners mindset of accountability, the management and technical skills, personality type, work ethic, integrity, how they work under pressure, and long-term objectives.

Once you find the right partner, do not avoid investing the time and money to create a fair and equitable contract that aligns the incentives and rewards of everyone involved.

7. Failing to find and use mentors. You don't have to do this alone. You will be surprised to find just how many people want to help you so take the time to follow successful inspirational and industry leaders.

Ask for help, and surround yourself with experts and people who inspire you. Read their books, watch their videos, and learn from their mistakes.

8. Screwing up your cap table. I am amazed at what people do to mess up any chance at financing. Time and time again I meet entrepreneurs who cut a deal exchanging equity for rent or services. They think in whole percentages. On the other side is the entrepreneur who wants to maintain “control” and all the stock.

I learned this lesson at least 100 times over my career. I started companies as early as 1986 and started actively angel investing in 1998 but my real pain happened between 2000 and 2005. I watched, participated, and suffered through every type of creative financing as companies were struggling to raise capital in this time frame. I’ve seen every type of liquidation preference structure, pay-to-play dynamic, preferred return, ratchet, share/option bonus, option re-pricing, and carve out.

My companies or investments suffered through the next financing after implementing a complex structure, or a sale of the company, or liquidation. I’ve spent way too much time (and way too much money) with lawyers, rights offerings, liquidation waterfalls, and angry/frustrated people who are calculating share ownership by class to see if they can exert pressure on an outcome that they really can’t impact anyway, and certainly haven’t worked toward constructively contributing to a success.

After all of this, I have two simple rules for founders: First, make damn sure you know where the capital is going to come from to fully fund your business. You might be able to bootstrap (my strong preference) or have it in the bank from existing operations or your own past exit. Your existing investors might be willing to provide it, if they are properly motivated and believe in your business. Or you might need to raise it.

Until you are consistently generating positive cash flow, you depend on someone else for financing. And, in this kind of environment, that can be very painful, especially if you need to go find someone who isn’t already an investor in your company (e.g. your insiders require there to be an outside lead, or you need to raise much more capital than your insiders can provide.)

Second (and most important), keep your capital structure simple. There are three things that will mess you up in the long run:

Inappropriate preferences: A simple rule is that if you’ve raised more than $25m and your liquidation preference is greater than 50% of your post money valuation, you have too much liquidation preference. You should use this at every scale of financing even though this is obviously a little tricky in early rounds and with modest up-round financings. However, as long as you have a liquidation preference that is high relative to your overall valuation it’s generally a bad thing. As you raise more money at higher valuations, this must normalize. If you end up doing a down round, simply use the down round to clean up your preference overhang.

Weird deals. I’ve seen company’s loan money to key employees to buy stock (what a sweet deal a secured loan you don’t have to pay unless you are successful!), use equity to pay for rent, create option pools worth 50% of the capitalization, write off then recreate debt, the list goes on and on.

Bottom line anything not standard will give any investor pause; keep it simple, and keep it clean.

9. Contracting “finders” or paying “finders fees” to help you raise money. I am always surprised how often I find entrepreneurs use finders who are not licensed broker dealers.

It is clearly illegal. No lawyer would sanction it. Investors hate it. If you get caught it can kill the company and somebody might just go to jail. Don’t do it.

10. Building an unbalanced team. Diversity is your friend because engineers or scientists found most startups I work with. What you must realize is when you launch, your product will account for only about 10 percent of your business’s success, with the other 90 percent coming down to developing the most effective business model and sales and marketing. I am putting you on notice:

You are not in your “awesome product” business; you are in the sales and marketing business no matter what your product or service is.

You need to either become an expert at sales and marketing, and running a business or hire or partner with somebody who is. Building a team with the right mix of skills is critical for any startup.

I hope this helps at least a few of you avoid the most common mistakes. Trust me, there are a lot more! What is the most common mistake you see entrepreneurs make? PLEASE include your advice in the comments or reach me at [email protected] or connect with me on LinkedIn.